MACRO: Bank Market Power and Central Bank Digital Currency: A Case of Imperfect Substitution; Dr Yu ZHU (Bank of Canada)

Abstract

This paper studies the effect of a central bank digital currency (CBDC) on bank intermediation when the CBDC is an imperfect substitute for bank deposits and the deposit market is imperfectly competitive. We show that a CBDC can promote bank intermediation and output if the CBDC rate is in some intermediate range. A CBDC that is a better substitute has larger positive effects. It can raise lending and output by more. It starts to increase lending and output at a lower interest rate and it promotes intermediation and output for a wider range of interest rates. Therefore, to better reap the benefit of a CBDC, it should be designed as a close substitute to bank deposits.

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