Implications of Central Bank Digital Currency for Monetary Operations

Fintech Notes, October 4, 2024

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Implications of Central Bank Digital Currency for Monetary Operations

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Bibliographic details

• Authors: Tansaya Kunaratskul, Andre Reslow, Manmohan Singh
• Published: October 4, 2024
• Series: Fintech Notes
• DOI: https://doi.org/10.5089/9798400289019.063

Overview

• Purpose: Analyze how issuance of central bank digital currency (CBDC) could affect monetary operations, defined as central banks managing the demand and supply of reserves to achieve a desired stance of monetary policy.
• Authors: Tansaya Kunaratskul, Andre Reslow, Manmohan Singh
• Date of publication: October 4, 2024
• Series: Fintech Notes No 2024/007

Scenarios of CBDC substitution and their implications

• Scenario: CBDCs substituting cash.
  • Implication: Changes to central bank and commercial bank balance sheets as cash holdings shift to CBDC holdings.
• Scenario: CBDCs substituting commercial bank deposits.
  • Implication: Potential deposit outflows from commercial banks, affecting banks’ funding and reserve dynamics.
• Scenario: CBDCs substituting reserves.
  • Implication: Direct effects on the reserve base held at the central bank, with immediate implications for liquidity and monetary control.
• Note: Implications vary based on design features and market developments.

Effects on monetary operations and market rates

• CBDC-induced balance sheet and reserve changes can:
  • Draw short-term interest rates away from the policy target.
  • Complicate liquidity forecasting for central banks.
• Operational challenge: Maintaining a desired stance of monetary policy when short-term rates deviate and liquidity conditions become harder to predict.

Monetary operations tools and calibration

• Central banks could calibrate operations to offset CBDC effects, including:
  • Engaging in fine-tuning operations to address temporal liquidity mismatches.
  • Providing additional reserves on demand to ensure maintenance of the monetary policy stance.

Design features to mitigate adverse effects

• Careful CBDC design can limit adverse impacts on monetary operations by setting:
  • Criteria for access (who can hold or transact in the CBDC).
  • Holding quantity limits (caps or thresholds on CBDC balances).
  • Remuneration (interest or yield policies on CBDC holdings).
• Design choices interact with market developments to determine the scale and persistence of effects on reserves and short-term rates.

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