The Usefulness of CBDCs

Two recent pieces address the usefulness and role of CBDCs.

One explores the theoretical benefits of a CBDC in a high inflation environment, the other the impact of a CBDC if a loss of confidence in the banking system leads to a run on the banks.

Controlling inflation with CBDCs

The Observer Research Foundation has looked at the possible role of CBDCs in containing inflation. It argues that data generated from CBDC transactions can be linked to strict reserve requirements for commercial banks providing, at least in theory, a framework for controlling inflation.

The traditional approach to limiting inflation is to raise interest rates swiftly and decisively to reduce demand and bring demand and supply back into equilibrium.

Consumer Price Index (CPI) reports are usually based on market participants reporting to the central bank on assets and liabilities. Issues with this include the data being out of date, incomplete or inaccurate. Access to data from CBDCs would provide economists with near real time information on balances held at financial institutions, and metadata on what is being spent where. This would allow much more granular and useful CPI measurement.