In recent years, the use of digital payment methods for transactions has been increasing at the expense of cash, a pattern that has become more pronounced since the outbreak of the Covid-19 crisis (e.g. Auer et al. 2020). In response to this shift, central banks have started to investigate the benefits and implications of issuing central bank digital currency (CBDC). The ultimate goal of a CBDC is to ensure that individuals operating in an increasingly digitalised economy continue to have access to public money as a means of payment.
However, there are concerns that if also widely used as a store of value, CBDCs may disintermediate banks (e.g. ECB 2020, Adalid et al. 2022, Bindseil and Panetta 2020, and Jamet et al. 2022). Given the perceived degree of substitutability between CBDC and bank deposits (Burlon et al. 2022) and the increasing demand for safe liquid assets as a store of value, there are good grounds for this concern.
The aim of our new study (Muñoz and Soons 2023) is to evaluate how the introduction of a CBDC as a store of value affects bank intermediation, investments and welfare by altering consumers’ portfolio choice between public money and private money in a model that accounts for the empirical evidence on cash holdings. For this purpose, we develop a model a la Diamond and Dybvig (1983) with public money and heterogeneous beliefs about bank stability. Our simulations show that there is a wide range of cases in which, despite the partial disintermediation of banks, the introduction of a CBDC that serves as a superior public storage technology increases social welfare.
Motivating evidence
Our analysis is motivated by three key empirical findings:
- The bulk of cash is held for store of value purposes. Despite the fact that the use of cash as a means of payment has been decreasing in recent years, cash holdings as a percentage of GDP have continued to increase (Ashworth and Goodhart 2020).
- Cash holdings sharply increase in times of high economic uncertainty. Various empirical studies document the heavy reliance of demand for cash on economic uncertainty, perceived bank stability and the state of the economy (e.g. Jobst and Stix 2017, Rosl and Seitz 2021, Baubeau et al. 2021).
- Only a proportion of the population holds cash as a store of value. For the particular case of the euro area, see ECB (2022) and Zamora-Perez (2021).
Figure 1 illustrates some of these empirical observations for the case of the euro area. Panel (a) reports euro-denominated aggregate cash holdings as a per cent of GDP at the annual frequency and for the period 2003-2021. Cash holdings have been increasing over the entire horizon. Panel (b) displays the estimated component of total cash holdings used for transaction purposes (dashed line) and that used as a store of value (solid line). The steady increase in aggregate cash holdings over time is to be mainly attributed to the patterns of the estimated cash holdings as a store of value. Panel (c) plots the cyclical component of euro-denominated aggregate cash holdings.
Figure 1 Euro-denominated cash holdings