Economics

I aim to evaluate the role of central bank digital currencies ("CBDCs") in stimulating the economy and their effects on fractional reserve banking and financial stability. CBDCs are "central bank accounts accessible by the public in the same way deposit accounts are today" (Andolfatto, 2018, p.2). Since 2015, the euro area's GDP growth has lagged behind historic levels despite hyper-accommodative monetary policy. Two-thirds of European government bond yields are already
negative and long-dated Treasury yields are low (Hildebrand, 2019). Given the decreasing effectiveness of existing tools, monetary policy innovation is inevitable.

CBDCs could spearhead this innovation. As interest-bearing accounts, they could make negative rates effective (Buiter, 2009; Rogoff, 2014 and 2016) and strengthen the monetary policy toolkit (Assenmacher and Krogstrup, 2018; Haldane, 2015). The price and quantity of CBDCs issued by central banks may constitute a countercyclical policy instrument (Barrdear and Kumhof, 2016). Interest payments on accounts could be directly made by central banks (Berentsen and Schar, 2018; Davoodalhosseini, 2018). This would entail a narrowing of the relationship between central banks and the public by removing the necessity to keep deposits in commercial banks (Raskin and Yermack, 2016). CBDCs could, therefore, bring financial stability (Crawford et al, 2018), partly due to the absence of counterparty and bank run risks of central banks (Broadbent, 2016).

However, as many deposits would be converted to safer, interest-paying central bank accounts, banks would lose much of their funding and might have to turn to less stable wholesale market debt. This could reduce the amount of bank credit (Broadbent, 2016), and have an overall destabilising impact (Cecchetti and Schoenholtz, 2017). Alternatively, Andolfatto (2018) has found that CBDCs would not disintermediate banks, which may even expand their depositor base by increasing deposit rates.

There are essential questions raised by the literature. Would CBDCs stabilise or destabilise financial markets, given the countervailing forces at play? The question of the possible transformation of banking "is a relevant question" (Broadbent, 2016, p.8) and "[t]he effects of CBDC[s] on the banking system...are yet to be explored" (Davoodalhosseini, 2018, p.40). Finally, can fractional reserve banking and narrow banking even coexist, and, if so, how do
CBDCs affect the likelihood of a bank run (Barrdear and Kumhof, 2016)?