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Title: Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics

Author(s): Dirk Niepelt

Publication Date: November 2020

Keyword(s): bank profits, Central bank digital currency, deposits, equivalence, Friedman Rule, monetary policy, money creation, Ramsey Policy and Reserves

Programme Area(s): Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations and Public Economics

Abstract: We analyze policy in a two-tiered monetary system. Noncompetitive banks issue deposits while the central bank issues reserves and a retail CBDC. Monies differ with respect to operating costs and liquidity. We map the framework into a baseline business cycle model with "pseudo wedges" and derive optimal policy rules: Spreads satisfy modified Friedman rules and deposits must be taxed or subsidized. We generalize the Brunnermeier and Niepelt (2019) result on the macro irrelevance of CBDC but show that a deposit based payment system requires higher taxes. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.

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Bibliographic Reference

Niepelt, D. 2020. 'Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15457