The Bank of England has just released a significant Blockchain paper – Macroeconomics of central bank issued digital currencies, by John Barrdear and Michael Kumhof, which discusses the consequences of a central bank making a digital form of cash available to the general public.
We study the macroeconomic consequences of issuing central bank digital currency (CBDC) — a universally accessible and interest-bearing central bank liability, implemented via distributed ledgers, that competes with bank deposits as medium of exchange. In a DSGE model calibrated to match the pre-crisis United States, we find that CBDC issuance of 30% of GDP, against government bonds, could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distortionary taxes, and monetary transaction costs. Countercyclical CBDC price or quantity rules, as a second monetary policy instrument, could substantially improve the central bank’s ability to stabilise the business cycle.
In other words, they are talking about a complex economic model in which anyone can hold money at a central bank, fully risk-free, as an alternative to bank deposits (money created by banks).
- The paper essentially models a partial Sovereign Money System in which anyone can hold their money in the form of risk-free digital cash created by central bank. This gives the public an alternative to bank deposits. However, banks would still be able to create money.
- In the model, digital cash is created only when the central bank purchases bonds from households or investors. The paper does not consider what would happen if the central bank created digital cash to finance government services or tax cuts, although it notes these questions for future research.
- The model suggests that the introduction of digital cash would have some key benefits:
- It could boost GDP by around 3%, due to “reductions in real interest rates, in distortionary tax rates, and in monetary transaction costs…’.
- It can give the central bank a second monetary policy tool to stabilise the economy.
- It could improve financial stability.
- The paper flags up the fact that the transition could be risky and needs to be well managed.
- In the section on Pros and Cons of CBDC, the paper confirms many of the advantages that we also covered in our paper Digital Cash: Why central banks should issue an electronic money.