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27 September 2023

CEPR's Niepelt: Retail central bank digital currency and the social costs of liquidity provision


It finds that a system based on a central bank digital currency can be a less costly alternative to the current two-tier regime, particularly after accounting for direct and indirect costs. Furthermore, it argues that the interest rate on the digital currency should differ from zero and from the rate of interest on reserves.

The current monetary architecture features non-banks that transact with bank deposits, and banks that settle payments with central bank reserves. This column compares the current regime with systems that also feature a central bank digital currency. It finds that a system based on a central bank digital currency can be a less costly alternative to the current two-tier regime, particularly after accounting for direct and indirect costs. Furthermore, it argues that the interest rate on the digital currency should differ from zero and from the rate of interest on reserves.

The prospect of retail central bank digital currency (CBDC) has rekindled interest in the architecture of the monetary system (Niepelt 2021). Currently, this architecture exhibits two tiers: nonbanks transact using bank deposits (or claims on deposits), while banks settle payments with central bank issued reserves. CBDC subverts this two-tier system by offering the general public a digital, central bank-issued payment instrument that directly competes with deposits (e.g. Böhme and Auer 2020, Board of Governors 2022). In other words, CBDC constitutes a step towards earlier monetary architectures, in which central banks offered accounts not just to banks but also to nonbanks (BIS 2018).

Should we take that step? In a new paper (Niepelt 2023), I address this question by analysing how monetary architecture shapes the social costs of liquidity provision. I compare three different regimes: (1) a two-tier payment system like the current one; (2) a single-tier central bank digital currency based system; and (3) a hybrid architecture in which reserves, deposits, and CBDC co-exist...

 more at CEPR



© CEPR - Centre for Economic Policy Research

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