Central Bank Digital Currency: Financial Inclusion vs Disintermediation

Abstract

An overlapping-generations model with income heterogeneity is developed to analyze the impact of introducing a Central Bank Digital Currency (CBDC) on financial inclusion, and its potential adverse effect on bank funding. We highlight the role of two design parameters: the fixed cost of CBDC usage and the interest rate it pays, and derive principles for maximum inclusion and for mitigating the inclusion-intermediation trade-off. Agents' choice of money instrument is endogenously driven by income heterogeneity. Pre-CBDC, wealthier agents adopt deposits, while poorer agents adopt cash and remain unbanked. CBDCs with low fixed costs (and low interest rates) are adopted by cash holders and directly increase inclusion. CBDCs with high fixed costs (and high interest rates) are adopted by deposit holders and increase inclusion by raising deposit rates. The former allows for more favorable inclusion-intermediation trade-offs. We calibrate the model to match the US income distribution and aggregate share of unbanked households. A CBDC 50% cheaper (30% more expensive) than bank deposits decreases financial exclusion by 93% (71%) without impacting intermediation. In comparison, making the deposit market perfectly competitive would only decrease exclusion by 45%.

To Demand or Not to Demand: On Quantifying the Future Appetite for CBDC

“…Davoodalhosseini 2022;Keister and Sanches 2022). OLG models, likewise, focus on falling deposit-policy rate spreads due to CBDC-induced stronger competition, alongside the implied loss in profit for banks (Andolfatto 2021) and the expected positive effects on financial inclusion (Banet and Lebeau 2022). 3 DSGE models started assessing the expected real economic effects: an assumed 30 percent CBDC to nominal GDP share was estimated to lift U.S. real GDP by 3 percent through a reduction in real interest rates, distortionary taxes, and monetary transaction costs in Barrdear and Kumhof (2021).…”

Central Bank Digital Currency, Poverty Reduction and the United Nations Sustainable Development Goals

“…Ozili (2022d) suggests that CBDC can increase financial inclusion by improving access to digital financial services and increasing the efficiency of digital payments. Banet and Lebeau (2022) analyze the impact of a CBDC on financial inclusion, and find that a CBDC that has low transaction cost and has high interest rate on CBDC deposits increases the level of financial inclusion. Didenko and Buckley (2021) show that if a CBDC is well-designed and well-implemented, it can increase financial inclusion by bringing more people into the financial system so that they can access low-cost financial services.…”

Digital Currency, the Financial Inclusion, Benefits, and Challenges in the Implementation of Enaira

“…These include online banking, debit, and credit cards, electronic funds transfers, direct credits, direct debits, etc. These payment systems, which are a key service offered by banks and other financial organizations, are utilized in place of tendering cash in domestic and international transactions (Banet & Lebeau, 2022). Both physical and electronic payment systems have their own processes and protocols.…”

“…The issuance of an eNaira CBDC has numerous advantages. Given that many developing nations have a sizable unbanked population, increasing financial inclusion may be the most significant advantage of issuing a CBDC in these nations (Banet & Lebeau, 2022). Financial inclusion makes sure that all people and enterprises have access to formal financial services that are both accessible and useful for enhancing welfare.…”