CBDC as Imperfect Substitute to Bank Deposits: A Macroeconomic Perspective

Abstract The impact of Central Bank Digital Currency (CBDC) is analyzed in a closed‐economy model with monopolistic competition in banking and where CBDC is an imperfect substitute with bank deposits. The design of CBDC is characterized by its interest rate, its substitutability with bank deposits, and its relative liquidity. We examine how interest‐bearing CBDC would affect the banking sector, public finance, GDP, and welfare. Welfare may improve through three channels: seigniorage; a lower opportunity cost of money; and a redistribution away from bank owners. In our numerical analysis, we find a maximum welfare improvement of almost 50 bps in consumption terms.