The Impact of Retail Central Bank Digital Currencies (CBDCs) on Macroeconomics

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

The introduction of retail central bank digital currencies (CBDCs) has been the subject of much discussion and analysis in recent years. Reports suggest that BIS economists conducted macroeconomic research on the potential impact of introducing retail CBDCs, which concluded that an optimal level of CBDC issuance is approximately 40% of a country’s gross domestic product (GDP). This article explores the findings of this report and the potential impact of CBDCs on macroeconomics.

What Are Retail Central Bank Digital Currencies (CBDCs)?

Before delving into the discussion of CBDCs and their potential impact, it is essential to understand what they are. Retail CBDCs are digital currencies issued by a central bank, which can be used by individuals and businesses to make payments or store value electronically.

The Potential Impact of CBDCs

The recent research carried out by BIS economists shows that the optimal level of CBDC issuance is approximately 40% of a country’s GDP. This is much higher than any proposed upper limit, including the digital euro. However, the researchers’ model predicts that the majority of CBDCs will not be held by consumers, but instead, commercial banks will convert a significant portion of their government bond holdings into CBDCs.
If the issuance rate is 30% of GDP, the report found that CBDCs can increase a country’s output by nearly 6% and achieve welfare benefits of over 2%. However, the authors believe that the optimal policy outcome accounts for an even higher proportion of GDP, reaching 40%.

The Impact on Banks and Deposits

The report also predicts that commercial bank deposits will only decrease by 6%, and bank deposits will return to their levels within six years, growing by 21.5% in the long run. The central bank’s increased government bond holdings by 30% of GDP mean that it becomes the primary bondholder from the government’s perspective.
However, a report by Morgan Stanley found that an issuance rate of 40% of GDP would result in a loss of 873 billion euros in bank deposits. This is much higher than the upper limit of digital euros, which is considered to be four times less than the optimal level of CBDC issuance.

Why Is There Such A Difference In CBDC Issuance Levels?

The difference in the proposed CBDC issuance levels is due to the differing models used by the researchers. The model used by the BIS economists predicts that consumers will not hold the majority of CBDCs, while commercial banks will convert their government bond holdings into CBDCs. This means that the CBDC stock will increase to 30% of GDP overnight, while commercial bank deposits will only decrease by 6%.

Conclusion

CBDCs may have a significant impact on macroeconomics if introduced at the right level of issuance. The BIS economists’ research suggests that an optimal level of CBDC issuance is approximately 40% of a country’s GDP, which is much higher than any proposed upper limit. The impact on bank deposits and the overall banking sector is still subject to uncertainty, but it is clear that a high level of CBDC issuance will impact commercial bank operations.

FAQs

1. What is the optimal level of CBDC issuance, according to BIS economists?
– The optimal level of CBDC issuance is approximately 40% of a country’s GDP.
2. How will commercial banks react to the introduction of CBDCs?
– The model predicts that commercial banks will convert a significant portion of their government bond holdings into CBDCs, meaning the effects on deposits will be minimal in the long run.
3. How will CBDCs impact overall economic output?
– The research by BIS economists found that a 30% GDP issuance rate of CBDCs could increase a country’s output by nearly 6% and achieve welfare benefits of over 2%.