A staff working paper written for the Bank of England postulates that central bank issued digital currency (CBDC) of 30% of GDP could permanently raise GDP by as much as 3% from lower real interest rates, taxes and monetary transaction costs, according to a recently published paper. The CBDC would be issued against government bonds.
The paper, “The macroeconomics of central bank issued digital currencies” by John Barrdear and Michael Kumhof, examines the macroeconomic impact of a central bank issuing electronic, national-currency-denominated and interest-bearing access to its balance sheet by the issuance of CBDC. The bank used a financial model matching the United States in the pre-crisis period. Bank deposits are created in this model through asset purchases and loans.
Banks have become interested in digital currencies after observing private digital currencies offering access to an alternative unit of account ruled by a set money supply. Bitcoin is the first and largest such system. Technology Makes It Feasible
A CBDC monetary regime has not existed, the paper noted. One reason is that the technology to make it feasible has not previously been available. Hence, there is little history to shed light on the costs and benefits of such a regime or to determine ways monetary policy can be conducted under such a regime.
The authors, therefore, used a theoretical model to study these issues.
The model postulates an initial CBDC stock equal to 30% of GDP issued against an equivalent amount of government debt. The plan chose 30% since it is similar to the magnitudes of quantitative easing conducted by central banks in the last 10 years.
The CBDC regime delivers several beneficial effects. It delivers a gain in steady-state GDP level of around 3% from lower real interest rates, transaction costs and distortionary tax rates.
A CBDC regime can add to the […]
