- The US has been giving constant thought to the Central Bank Digital Currency (CBDC) for quite some time now.
- The US Federal Reserve has released the latest study on the potential impacts of a retail CBDC on monetary policy implementation.
- The paper analyses the effects of operations with CBDCs via various scenarios and eventually concludes that the Fed would take the lead.
The United States Federal Reserve recently released a study on the potential effects of a retail Central Bank Digital Currency (CBDC) on the monetary policy execution of the US.
The study was a staff working paper and dates back to April, with the title Retail CBDC and US Monetary Policy Implementation, A Stylized Balance Sheet Analysis.
This paper basically considered four scenarios that demonstrate the potential effects of a retail CBDC on the US monetary policy from the standpoint of three stakeholders group, which are the Commercial banks, the Fed, and the US Households.
The foremost scenario consisted of exchanging cash for CBDC, which impacted the categorization of assets at the Fed. The household involved has no such effects on the implementation of the policy.
The following three scenarios had a spilled impact that initiated with folks withdrawing a CBDC from a commercial bank when the money had been deposited in the form of cash.
Furthermore, assuming fixed bank demands for reserves, the paper also talked about commercial banks’ reaction to the reduction in cash reserves resulting from withdrawals of CBDCs.
If at all those withdrawals result in reserves shortage, the banks would have the choice to offload specific securities or loans to create their cash holding again. Or they can surge the deposits by providing more attractive terms on the products, which would result in high short-term interest rates and lessen the demands for CBDCs by holding deposits in the banks for a longer duration.
However, if the interest rates surge quite strangely, then the Fed could turn their heads to the discount window and standing repo facility to balance the rates. And if it falls, then the proceeding move would be reserve management purchases.
The paper highlights that the potential effects on monetary policy implementation from a retail CBDC are highly dependent on the original conditions of the Federal Reserve’s Balance sheet, according to the authors.
CBDCs have been in discussion for a long time now. The US has specifically been quite skeptical and is constantly discussing the concept. At the same time, some others have already established their CBDCs.
Source: https://www.thecoinrepublic.com/2022/06/02/fed-paper-sheds-light-on-possible-impacts-of-cbdcs-on-us-monetary-policy/