CBDC demand simulation across high and low inflation regimes

This paper examines the effects of introducing a Central Bank Digital Currency (CBDC) as a direct central bank liability and payment instrument for the general public, using an empirically calibrated simulation model with a particular focus on the micro-foundation of convenience yield parameters. To account for different inflation regimes, we analyze the CBDC demand within a framework of persistently elevated inflation expectations. Specifically, we explore scenarios reflecting an increased target rate and assess how inflation affects cash holdings and the adoption of CBDCs. The model is calibrated using empirical data from the German economy and considers both deposit-like and cash-like CBDCs under varying remuneration structures. We further examine the implications of our findings in the context of commonly discussed holding limits and confirm model results with a representative survey for German households. • CBDC demand rises with inflation as cash becomes costly and less attractive to hold. • A deposit-like CBDC reaches 12–15% of M2 and crowds out both cash and deposits. • Central bank profits grow with the issuance of a deposit-like CBDC and with inflation. • Model results align with survey data, confirming heterogeneous household preferences.