Bank of Canada Staff Working Paper 2021-63: 'Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design'

'Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design'

Jonathan Chiu and Mohammad Davoodalhosseini

The Bank of Canada has considered what the impact of introducing a cash-like, deposit-like or universal CBDC would be on consumption, banking and welfare. It looked at how payment efficiency, price effects and bank funding costs would change in each scenario, the equilibrium effects that would result.

The concern about CBDCs for retail payments is that they will compete for deposit funding thereby crowding out banking and reducing output.

The paper found a cash-like CBDC would be more effective than a deposit-lie CBDC promoting both consumption and welfare. It could even crowd-in banking even where bank market power was absent. In its calibrated model the maximum benefit could be an increase of bank intermediation of 5.8% and the capture of 25% of the payment market. A deposit-like CBDC could crowd-out intermediation up to 2.6% and grab a market share of about 16.7%.