DP15457 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, Reserves
JEL(s): E42, E43, E51, E52, G21
Programme Areas: Public Economics, Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15457

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.