Central bank digital currency and balance sheet policy

This paper studies a stylized economy in which the central bank can hold either treasuries or risky securities against central bank digital currency (CBDC) deposits. The key mechanism driving the results is the reduction in bank deposits that follows the introduction of a CBDC and its impact on the banking sector. With CBDC funds invested in treasuries, the central bank channels funds back to the banking sector via open market operations and the introduction of a CBDC is neutral, consistently with the equivalence theorem of Brunnermeier and Niepelt (2019). However, it is not neutral when accounting for liquidity requirements, quantitative easing or for CBDC deposits held against risky securities. We reach three main conclusions. First, current monetary policy regimes do matter for CBDC equilibrium effects. Second, a CBDC might render current quantitative easing programs a quasi-permanent policy, as commercial banks might use their excess reserves to allow depositors to switch from bank to CBDC deposits. Third, there is a trade-off between bank lending to the economy and taxes, as holding risky assets against CBDC deposits leads to lower expected taxes and lower bank lending