Increasing CBDC Monetary Policy Impact

An important Central Bank Digital Currency (CBDC) topic is its impact on a central bank’s ability to implement monetary policy. A technical paper by the Bank for International Settlements (BIS) addresses this by examining the possible impact of paying interest on CBDCs and/or enabling CBDCs to compete with other payment methods in terms of their convenience of use ¹.

The research is based on the US financial system, which has the characteristics of having large excess reserves and the main monetary policy variable being interest rates.

The Federal Reserve sets interest rates on excess reserves held by banks. Since July 2021 this has been known as interest on reserve balances, but for the purposes of this paper it is referred to as Interest on Reserves Policy (IOR).