Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems
IMF Working Papers, March 17, 2023
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Bibliographic details
- Authors: Inutu Lukonga
- Published: March 17, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400236532.001
Summary and core findings
- Central bank digital currencies (CBDCs) promise many benefits but, if not well designed, they could have undesired consequences, including for monetary policy.
- Issuing an unremunerated CBDC or a wholesale CBDC does not change the objectives of monetary policy or the operational framework for monetary policy.
- CBDCs can induce changes in retail, wholesale and cross border payments that have negative spillover effects on monetary policy through effects on:
- money velocity,
- bank deposit disintermediation,
- volatility of bank reserves,
- currency substitution,
- capital flows.
- Countries most vulnerable are those with banking systems dominated by small retail deposits and demand deposits, low levels of digital payments and weak macro fundamentals.
- Proposed CBDC design features, such as caps on CBDC holdings and unremunerating the CBDC, can moderate disintermediation risks, but they are not sufficient.
- Central banks will need to ensure that unintended macroeconomic risks are comprehensively identified and mitigated.
Channels of monetary policy impact
- Money velocity: CBDC-induced changes in payment behavior can alter the velocity of money.
- Deposit disintermediation: Retail CBDCs may substitute for bank deposits, especially demand deposits, leading to reduced bank funding.
- Volatility of bank reserves: CBDC flows between the central bank and banks can increase reserve volatility.
- Currency substitution and capital flows: Cross-border CBDC use can affect currency substitution and capital flow dynamics.
Vulnerable country characteristics
- Banking systems dominated by small retail deposits and demand deposits.
- Low levels of digital payments adoption.
- Weak macro fundamentals.
Design features assessed and limitations
- Caps on CBDC holdings: Can moderate disintermediation risks.
- Unremunerated CBDC: May reduce incentives for deposit substitution.
- Wholesale CBDC: Issuing a wholesale CBDC does not alter monetary policy objectives or operational frameworks.
- Limitations: Design features alone are not sufficient; comprehensive identification and mitigation of macroeconomic risks are required.
Policy implications and recommendations
- Central banks should:
- Identify unintended macroeconomic risks from CBDC issuance comprehensively.
- Implement mitigation measures beyond simple design features (e.g., caps, lack of remuneration).
- Consider the specific vulnerabilities of their domestic banking systems (deposit structure, digital payments penetration, macro fundamentals) when assessing CBDC risks to monetary policy.
Publication and metadata
- Author: Inutu Lukonga
- Publication date: March 17, 2023
- Pages: 43
- Volume: 2023
- Issue: 060
- DOI: https://doi.org/10.5089/9798400236532.001
- Series: Working Paper No. 2023/060
- Stock No: WPIEA2023060
- ISBN: 9798400236532
- ISSN: 1018-5941
- Subjects: Central Bank digital currencies, Commercial banks, Financial institutions, Financial services, Islamic banking, Monetary base, Money, Technology, Velocity of money
- Keywords: CBDC, CBDC Pilots, Central Bank Digital Currencies, Commercial banks, deposit disintermediation, design option, Global, impact monetary policy implementation, Islamic banking, Islamic Finance, Monetary base, Monetary Policy, monetary policy implication, unremunerated CBDC, Velocity of money
IMF Working Paper by Inutu Lukonga (March 17, 2023), Working Paper No. 2023/060
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