DP15366 Designing Central Bank Digital Currencies

Author(s): Itai Agur, Anil Ari, Giovanni DellAriccia
Publication Date: October 2020
Keyword(s): CBDC, digital currency, Financial Intermediation, Fintech, network effects
JEL(s): E41, E58, G21
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15366

We study the optimal design of a central bank digital currency (CBDC) in an environment where agents sort into cash, CBDC, and bank deposits according to their preferences over anonymity and security; and where network effects make the convenience of a payment instrument depend on the number of its users. A CBDC can be designed with attributes similar to cash or deposits, and can be interest bearing: a CBDC that closely competes with deposits depresses bank credit and output, while a cash-like CBDC may lead to the disappearance of cash. Then, the optimal CBDC design trades of bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC alleviates the central bank's tradeoffs.