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Central Bank Digital Currency: Considerations, Projects, Outlook

7 days ago

Retail central bank digital currency has morphed from an obscure fascination of technophiles and monetary theorists into a major preoccupation of central bankers. Pilot projects abound and research on the topic has exploded as private sector initiatives such as Libra/Diem have focused policymakers’ minds and taken the status quo option off the table. In this eBook, academics and policymakers review what we know about the economic, legal, and political implications of CBDC, discuss current projects, and look ahead.

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Contents
Foreword
IntroductionDirk Niepelt
Part I: Considerations
Central bank digital currency, bank intermediation and paymentsJonathan Chiu and Francisco Rivadeneyra

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Central bank digital currency: Considerations, projects, outlook

7 days ago

Within a few years, retail central bank digital currency (CBDC) has morphed from an obscure fascination of technophiles and monetary theorists into a major preoccupation of central bankers. Pilot projects abound and research on the topic has exploded as private sector initiatives such as Libra/Diem have focused policymakers’ minds and taken the status quo option off the table.1 
In a new CEPR eBook (Niepelt 2021), academics and policymakers review what we know about the economic, legal, and political implications of CBDC, discuss current projects, and look ahead.
Download the eBook Central Bank Digital Currency: Considerations, Projects, Outlook here.
Considerations
The first part of the eBook focuses on specific aspects or implications of CBDC. Jonathan Chiu and Francisco

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Money creation, bank profits, and central bank digital currency

February 5, 2021

Banks create deposit money, which is a cheap source of funding because deposits serve as a means of payment whose liquidity compensates for yield (e.g. McLeay et al. 2014). Many commentators have reservations about such private money creation. They argue that private banks reap the benefits of publicly provided central bank money by leveraging deposit insurance and lender-of-last-resort guarantees. Others disagree and contend that banks themselves produce liquidity and add value.
Either way, it is natural to ask how much banks profit from the deposit liquidity spread. In a recent paper (Niepelt 2020c), I provide an answer by developing a method to quantify the funding cost reduction. I find that for the US, it is in the order of half a percent of GDP. This has important

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Macroeconomic analysis

June 22, 2020

Is macroeconomics useful? A number of commentators have voiced doubts, pointing to the profession’s perceived failure to foresee the Great Recession as well as notoriously inconclusive policy recommendations. Of what use, they ask, is research that cannot reliably predict exchanges rates, interest rates, or business cycle turning points? Many see a field in decline.
Those who actually engage with macroeconomic research tend to disagree. As they emphasise, macroeconomics offers a coherent framework to understand and evaluate policy options. This framework undergoes constant refinement and extension but, naturally, the profession cannot predict shocks outside the framework’s domain. However, it can explain, quite successfully, how shocks propagate. And compared with a few decades

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Digital money and central bank digital currency: An executive summary

February 3, 2020

Digital money and central bank digital currency: An executive summary for policymakers
In central banks, finance ministries, and international working groups, discussions about digital money and central bank digital currency (CBDC) have moved to the fore (BIS, 2020). It seems useful to take stock. What are we actually talking about? What do we know? And what should policymakers do?
Finance has been digital forever – what’s new about ‘digital money’?
‘Digital money’ is a misnomer. Households and firms have long held digital money balances, in addition to notes and coins. Banks have issued digital money – demand deposits – for decades. And central banks have done likewise, issuing reserves, but only to commercial banks.
What has changed in recent years is the ease

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Libra paves the way for central bank digital currency

September 12, 2019

This column is a lead commentary in the VoxEU Debate "The Future of Digital Money"
Plans by Facebook and its partners to launch Libra, a global digital currency, are at an early stage but they have focused minds. ‘Old finance’ frets about the prospective new competitor; the FinTech sphere is buzzing with rumours; and regulators, central banks, and legislators alike are worried. Lack of detail in the Libra whitepaper adds to the nervousness.
Are we witnessing a seismic shift in the monetary system? Probably, but Libra’s role in that shift is going to be an indirect one. Rather than the protagonist, Libra will be a catalyst for monetary change – a change that is driven, nolens volens, by regulators, central banks, and traditional financial intermediaries.
Digital currencies
What

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Central bank digital currency: Why it matters and why not

August 20, 2018

Far into the 20th century, central banks commonly offered accounts not only to a select group of financial institutions but also to non-banks. This liberal approach has given way to a monetary arrangement where access to electronic central bank money(‘reserves’) is generally restricted to banks. When households or non-financial firms pay electronically, they use privately issued money (e.g. bank deposits), not central bank money.
This arrangement is increasingly being questioned. Following Tobin (1985), many have proposed a form of digital central bank money for use by the general public– ‘reserves for all’, or RFA – and have debated potential benefits and risks.1 The discussions typically lack a model, and fundamental economic issues often remain obscure while questions

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Central banking and Bitcoin: Not yet a threat

October 19, 2016

The blockchain technology underlying Bitcoin and other cryptocurrencies is attracting growing interest. This column argues that if transactions facilitated by this technology become pervasive, it will have implications for the conduct (and success) of central bank monetary policy. Central banks should embrace the technologies that underpin cryptocurrencies, or risk being cut out from intermediation and surveillance and also risk payment service providers moving to other currency areas with an institutional environment that is more appealing for buyers and sellers.

While excitement about Bitcoin appears to have subsided, the blockchain technology underlying Bitcoin and other cryptocurrencies is attracting growing interest (e.g. Oliver Wyman 2016). Central banks have joined the FinTechs and bricks-and-mortar financial institutions in paying attention (Economist 2016). Not a week passes without a monetary authority declaring interest in the technology, and in opportunities to employ it. What are the likely implications of this for central banks and the monetary system?
Internet-based technology has made it cheap to collect information and to network. This has empowered the sharing economy and allows FinTechs to seize intermediation business from banks.

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