More and more central banks are planning or considering the possibility of issuing a “general purpose” also said “retail” central bank digital currency (CBDC), that would be accessible to the public and the financial institutions and have published reports on the subject
The author lists the main options
central banks would be faced with when defining their policies regarding
the remuneration of retail CBDC, as well as the main areas they would
probably look at when making their choices. He assesses qualitatively
the impacts of the choices made on the likely areas of interest for
central banks, showing that whether the policy rate and/or the rate on
CBDC is positive or null or strictly negative matters. Eventually, the
two main policies that stand out are to issue a “banknote-like” CBDC,
i.e. not to remunerate it, or to do so following a rule derived from the
central bank’s interest rate policy for excess reserves.
More and more central banks are planning
or considering the possibility of issuing a “general purpose” also said
“retail” central bank digital currency (CBDC), that would be accessible
to the public and the financial institutions (Boar et al., 2020), and have published reports on the subject (see e.g. BIS, 2020, Bank of Japan, 2020 and ECB, 2020)2.
Although the issue of whether or not the CBDC should be interest
bearing is usually discussed, the possibility that the interest rate
could be negative is hardly mentioned. In fact, the discussion regarding
a possible negative remuneration of retail CBDC focuses on the fact
that issuing this new form of central bank money would not allow to
decrease the so-called “effective lower bound” (ELB, i.e. the
lowest interest rate level monetary policy can reach), since cash would
continue to be available. This point is valid as long as cash itself is
not interest bearing. However, referring to the ELB does not exhaust the
discussion on a possible negative remuneration of CBDC.
This lack of an in-depth discussion on
the sign of the interest rate on retail CBDC contrasts with the fact
that many central banks in developed economies have implemented negative
interest rate policies for several years, in Europe (euro area, Sweden,
Switzerland) and in Asia (Japan). It contrasts also with the concern
put forward in central banks’ communication not to compete with the
banking sector when issuing a CBDC. A priori, setting a not-so
attractive interest rate on CBDC, including a possibly negative one,
would be a simple solution to limit such competition.
This paper instead aims at considering
various possibilities. It starts by listing the main policy options
central banks would be faced with when defining their policies regarding
the remuneration of retail CBDC. It then looks at the areas which would
likely be important when making these choices. In a third step, it
assesses qualitatively the impacts of the policy choices on the likely
areas of interest for central banks, showing that whether the policy
rate and/or the rate on CBDC is positive or null or strictly negative
matters. It concludes by discussing briefly the options the central
banks could retain.
Table 1 below summarizes the approach and the main findings.
Table 1: Remuneration of CBDC and Impacts
In Table 1, “IOER” stands for “interest on excess reserves” (see below).
Discussions on CBDC remuneration usually
distinguish two cases: the CBDC is interest bearing or it is not. In
fact, not bearing an interest is a specific case of remuneration: the
interest rate is fixed and set at zero. Besides, a classical distinction
in monetary economics is that decision-making is either rule-based (i.e.
before deciding on the level of the interest rate, the central bank
decides on which criteria it is going to base its decision) or
discretionary (the central bank decides on a purely case by case basis).
In particular, it can be shown that, by increasing the credibility of
the central bank and reducing uncertainty, a rule-based approach
contributes to making monetary policy more efficient.3
As can be seen in the left part of Table 1, I retain both approaches,
applying the distinction between rule-based and discretionary
decision-makings to the case in which retail CBDC is interest bearing.
The reference rate for the rule-based
decision-making (see upper middle left part of Table 1) is here the
policy rate that puts a “floor” to the level of money market rates,
since no one would accept to lend in the money market at an interest
rate that is lower than the one paid by the central bank. In the Federal
Reserve’s monetary policy framework, this rate is referred to as the
interest rate on excess reserves (IOER), i.e. the reserves held
by banks on top of required reserves. The interest rate on retail CBDC
could not be set at a level higher than the IOER, unless individual
limits are set on individual holdings, a possibility I will return to in
the following. Otherwise, banks would prefer to hold CBDC rather than
reserves and the “floor” to interest rates in the money market would be
determined by the rate on retail CBDC, thus depriving the IOER of its
role. Consequently, the rule I have in mind would be one in which the
IEOR acts as a “ceiling” to the interest rate on CBDC, with the latter
determined on the basis of the IOER minus a spread. On the one hand, a
spread of a minimum size would be useful if the central bank wishes
banks not to hold the retail CBDC. On the other hand, an upper limit for
the size of the spread would avoid discouraging completely the use of
retail CBDC. In terms of figures, the spread could for instance be
anywhere between 25 and 150 basis points. Most of all, it would have to
be set in advance.
Furthermore, when the interest on CBDC
is set discretionarily (see lower middle left part of Table 1), I
distinguish two cases: the interest rate can be either above or below
the rule-based rate. That the latter is not determined precisely does
not matter. What matters is rather that the central bank has not
announced a rule. Consequently, the spread between the interest rate on
retail CBDC and the IOER could vary randomly, with a change in the level
of one interest rate not necessarily triggering one in the other, or
not necessarily one of the same magnitude: there would be no certainty
that the two interest rates would move in tandem. Why would a central
bank choose to set the interest rate on retail CBDC in a discretionary
manner? One may think of specific purposes or circumstances in which the
central bank may wish not to ‘tie its hands’ in advance and thus make
this interest rate a monetary policy or financial stability instrument
of its own. For instance, the central bank may desire, in the wake of
the launch of the CBDC, to ‘test the water’, keeping the faculty to
reduce the interest rate on retail CBDC if substitution out of deposits
was deemed too rapid, although a rule could include a transition clause.
It may also wish, in case of a ‘run’ out of banks’ deposits into retail
CBDC, to try to counter it in the same way. However, this might prove
counter-productive, especially if the public is of the opinion that the
central bank has privileged information on the situation of the banking
system, e.g. because it is in charge of bank supervision.
In the case where the retail CBDC is not
interest bearing (lower left part of Table 1), I refer directly to the
sign of the IOER....
by Christian Pfister
Paris 1 Panthéon-Sorbonne and Sciences Po1
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