The Optimal Level of Central Bank Digital Currencies: Research Findings
According to reports, BIS economists conducted macroeconomic research on the potential impact of introducing retail central bank digital currencies (CBDCs) and concluded that the o
According to reports, BIS economists conducted macroeconomic research on the potential impact of introducing retail central bank digital currencies (CBDCs) and concluded that the optimal level of CBDCs is a issuance rate of 40% of gross domestic product (GDP). The report found that if the issuance rate is 30% of GDP, CBDC can increase a country’s output by nearly 6% and achieve welfare benefits of over 2%. However, the author believes that the optimal policy outcome accounts for an even higher proportion of GDP, reaching 40%. This CBDC issuance level is significantly higher than any currently proposed upper limit. For example, it is almost four times the upper limit of the digital euro being discussed, and a report by Morgan Stanley in 2021 found that this would result in a loss of 873 billion euros in bank deposits. However, this high number is due to researchers predicting that consumers will not hold the majority of CBDCs. Their model predicts that the CBDC stock will increase to 30% of GDP overnight, while commercial bank deposits will only decrease by 6%. The difference is that banks convert a significant proportion of their government bond holdings into CBDCs. In fact, the document predicts that bank deposits will return to their levels within six years and grow by 21.5% in the long term. From the government’s perspective, the central bank has increased its government bond holdings by 30% of GDP, which means it is the main bondholder.
BIS research shows that the optimal level of CBDC is 40% of GDP
As central bank digital currencies (CBDCs) become more of a topic of discussion, the potential impact on the macroeconomy has become a concern for many. In fact, the Bank for International Settlements (BIS) recently published a report that examined the optimal level of CBDC issuance and the potential impact on a country’s output and welfare benefits.
What is CBDC?
Before delving into the research, it’s important to first define CBDC. A CBDC is a digital form of fiat money that is issued and backed by a country’s central bank. It has the potential to act as a secure and efficient payment system, offering benefits such as reducing transaction costs and increasing financial inclusion. However, the introduction of CBDCs also has the potential to disrupt the financial system and have various economic impacts.
Research Findings
According to the BIS report, the optimal level of CBDC issuance is 40% of gross domestic product (GDP). The report found that if the issuance rate is 30% of GDP, CBDC can increase a country’s output by nearly 6% and achieve welfare benefits of over 2%. However, the author believes that the optimal policy outcome accounts for an even higher proportion of GDP, reaching 40%.
This CBDC issuance level is significantly higher than any currently proposed upper limit. For example, it is almost four times the upper limit of the digital euro being discussed, and a report by Morgan Stanley in 2021 found that this would result in a loss of 873 billion euros in bank deposits. However, this high number is due to researchers predicting that consumers will not hold the majority of CBDCs.
Consumer Behavior and CBDCs
The BIS researchers predict that the CBDC stock will increase to 30% of GDP overnight, while commercial bank deposits will only decrease by 6%. This is because banks are predicted to convert a significant proportion of their government bond holdings into CBDCs. In fact, the document predicts that bank deposits will return to their levels within six years and grow by 21.5% in the long term.
From the government’s perspective, the central bank has increased its government bond holdings by 30% of GDP, which means it is the main bondholder.
Conclusion
The introduction of CBDCs is a complex and controversial topic that requires in-depth research and analysis. The BIS economists’ findings suggest that an optimal level of 40% of GDP for CBDC issuance is recommended to maximize welfare benefits and output. However, there are concerns about the impact on consumer behavior and the potential for the displacement of bank deposits.
The implementation of CBDCs is still in early stages, with countries such as China and Sweden leading the way. As more research is conducted and pilot programs are launched, it will be interesting to see how the optimal level of CBDC issuance evolves and how it will impact the global financial system.
FAQs
1. How will CBDCs impact commercial banks?
CBDCs have the potential to disrupt the traditional banking system as more consumers and businesses use them for transactions. Banks may see a shift in their deposit holdings as more funds are converted into CBDCs.
2. Will CBDCs be accessible for everyone?
CBDCs have the potential to increase financial inclusion as they can provide a low-cost payment system. However, it is important for governments to ensure that CBDCs are accessible to everyone, including those who may not have access to traditional banking systems.
3. What is the timeline for the introduction of CBDCs?
The timeline for the introduction of CBDCs varies by country. Some countries, such as China, have already launched pilot programs while others are still in the research and development phase.
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