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 off bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC alleviates the central bank's tradeoff.
Several central banks have begun actively investigating the possibility of issuing central bank digital currency (CBDC). This new central bank liability would be a widely accessible digital form of fiat money, intended as legal tender. This chapter aims to answer a simple question: Does CBDC offer benefits? On the demand side, would it satisfy end user needs better than other forms of money? And on the supply side, would issuing CBDC allow central banks to more effectively satisfy public policy goals, including financial inclusion, operational efficiency, financial stability, monetary policy effectiveness, and financial integrity? In short, is CBDC a desirable form of money given existing and rapidly evolving alternatives? The chapter includes a summary of pilot projects and studies from central banks exploring the possibility of issuing CBDC. The analysis is based on publicly issued materials and discussions with staff members at central banks and technology providers around the world.
DISCLAIMER: Staff Discussion Notes (SDNs) showcase policy-related analysis and research being developed by IMF staff members and are published to elicit comments and to encourage debate. The views expressed in Staff Discussion Notes are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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 payment instruments dependent on the number of their users. 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 off bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC alleviates the central bank's tradeoff.
The paper investigates the international integration of EM sovereign dollar-denominated and local-currency bond markets. Factor analysis is used to examine movements in sovereign bond yields and common sources of yield variation. The results suggest that EM dollar-denominated sovereign debt markets are highly integrated; a single common factor that is highly correlated with US and EU interest rates explains about 80 percent of the total variability in yields. EM sovereign local currency bond markets are not as internationally integrated, and three common factors explain about 74 percent of the total variability. But a factor highly correlated with US and EU interest rates still explains 63 percent of the yield variation accounted for by common factors. That said, there is some diversity among EM countries in the importance of common factors in affecting sovereign debt yields.
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