QCGBF Virtual Seminar Series: Michael Kumhof: The Open Economy Macroeconomics of Central Bank Digital Currencies

About the Event

The Qatar Centre for Global Banking & Finance welcomes Michael Kumhof from the Bank of England to present this virtual seminar.

Paper Abstract

We study the open-economy implications of introducing CBDCs into a 2-country DSG Eenvironment that features a realistic financial system, with households deriving liquidity services from both CBDCs and bank deposits. We make several assumptions about the architecture and design features of CBDCs:

1. We focus on retail CBDC, and allow households to hold CBDCs in any currency
2. CBDCs are strictly separated from reserves, and are remunerated at an interest rate below the policy rate due to their non-pecuniary convenience yield
3. CBDCs are introduced via central bank purchases of government bonds or transfers to the government budget, ruling out direct and guaranteed conversion of bank deposits into CBDC at commercial banks
4. CBDCs are separately issued in both countries.

We show that the introduction of CBDCs by a single economy is highly beneficial in terms of output and welfare. The effects of financial disturbances are not exacerbated by the presence of CBDCs, in fact their effect on banks is typically mitigated. Large reallocations of liquidity between currencies, and between deposits and CBDC, yield benign balance sheet adjustments and small real effects. Finally, a more aggressively countercyclical use of the interest rate on CBDC could be highly beneficial in terms of stabilizing output and inflation.