Digital Money and Central Bank Operations

IMF Working Papers, May 6, 2022

Source details

Publication title: Digital Money and Central Bank Operations
Authors: Charles M. Kahn, Manmohan Singh, Jihad Alwazir
Date: May 6, 2022
Format: IMF Working Papers, Working Paper No. 2022/085, Issue: 085, Volume: 2022, Pages: 23
DOI: https://doi.org/10.5089/9798400206955.001
Stock No: WPIEA2022085
ISBN: 9798400206955
ISSN: 1018-5941

Primary question: To what extent do new and proposed monetary vehicles (including CBDC, stablecoins, payment service providers, etc.) upend the role of and implementation of monetary policy?
Channel emphasized: The interest rate channel and whether digital money (especially CBDC) will change monetary policy and central bank operations.
Scope of analysis:
- Trends in currency-in-circulation.
- Impacts on central bank seigniorage.
- Effects on the monetary base.
- Changes to transactional velocity of digital money if money demand declines.
- The importance of liquidity outside the monetary base.

The rise of new and proposed monetary vehicles, including CBDC, stablecoins, payment service providers etc., are unprecedented.
New policy instruments make sense only to the extent that there is limited substitutability between the various payment sectors.
If money demand declines, currency-in-circulation trends can affect:
- Central bank seigniorage.
- The monetary base.
- The transactional velocity of digital money.
Liquidity outside the monetary base will be important to understand for assessing central bank operations under digital money adoption.

Subject: Central Bank digital currencies, Commercial banks, Currencies, Digital currencies, Financial institutions, Monetary base, Money, Technology
Keywords: Base money, CBDC, Central Bank digital currencies, central bank operations Charles Kahn, central bank profits, central bank regulation, central banking operations, Commercial banks, Currencies, currency in circulation, Digital currencies, digital money, jihad Alwazir, lender-of-last-resort facilities, mobile phone operators, Monetary base, payments assets, phone company payments account, seigniorage

The degree of substitutability across payment sectors determines whether new monetary policy instruments are warranted.
Central banks need to monitor and analyze:
- Trends in currency-in-circulation.
- Shifts in money demand and transactional velocity associated with digital money.
- Liquidity arrangements and balances that exist outside the traditional monetary base.
Implicit recommendation: Design of central bank responses and policy instruments should be informed by empirical assessments of substitutability and off-base liquidity dynamics.

IMF Working Paper No. 2022/085 (May 6, 2022).