How Central Bank Digital Currency Design Choices Impact Monetary Policy Pass-Through and Market Composition

We explore the implications of introducing a central bank digital currency (CBDC) through commercial banks that differ in size. We focus on two design features of CBDCs: the interest rate and payment convenience. These features correspond to the "store of value" and "medium of exchange" properties of currencies. Payment convenience is an under-explored aspect of CBDC design which interacts with the monetary benefits of interest payments. Raising the interest rate on the CBDC may enhance monetary policy pass-through but have negative consequences on market composition. In contrast, raising the CBDC convenience value levels the playing field for competition between banks, but can weaken the transmission of monetary policy. A CBDC with sufficiently high convenience value can strengthen the transmission of monetary policy