The Optimal Level of Retail Central Bank Digital Currencies (CBDCs) for Macroeconomic Impact

According to reports, BIS economists conducted macroeconomic research on the potential impact of introducing retail central bank digital currencies (CBDCs) and concluded that the optimal level of CBDCs is a issuance rate of 40% of gross domestic product (GDP). The report found that if the issuance rate is 30% of GDP, CBDC can increase a country’s output by nearly 6% and achieve welfare benefits of over 2%. However, the author believes that the optimal policy outcome accounts for an even higher proportion of GDP, reaching 40%. This CBDC issuance level is significantly higher than any currently proposed upper limit. For example, it is almost four times the upper limit of the digital euro being discussed, and a report by Morgan Stanley in 2021 found that this would result in a loss of 873 billion euros in bank deposits. However, this high number is due to researchers predicting that consumers will not hold the majority of CBDCs. Their model predicts that the CBDC stock will increase to 30% of GDP overnight, while commercial bank deposits will only decrease by 6%. The difference is that banks convert a significant proportion of their government bond holdings into CBDCs. In fact, the document predicts that bank deposits will return to their levels within six years and grow by 21.5% in the long term. From the government’s perspective, the central bank has increased its government bond holdings by 30% of GDP, which means it is the main bondholder.

BIS research shows that the optimal level of CBDC is 40% of GDP

As the world moves towards digitalization, there has been an increasing interest in the introduction of retail central bank digital currencies (CBDCs) as a potential replacement for cash. While the benefits of CBDCs have been widely discussed, there has been much debate on the optimal level of CBDC issuance. Recently, BIS economists conducted macroeconomic research on the potential impact of introducing retail CBDCs and concluded that the optimal level of CBDCs is an issuance rate of 40% of gross domestic product (GDP).

What Are Retail Central Bank Digital Currencies (CBDCs)?

Before delving into the potential impact of CBDCs, let us first understand what these digital currencies really are. CBDCs are digital currencies that are issued by central banks, representing the digital form of a country’s fiat currency. These currencies are aimed at replacing cash in circulation and provide an efficient and secure mode of payment.

The Optimal Level of CBDC Issuance

The report by BIS economists conducted macroeconomic research on the potential impact of introducing retail CBDCs and concluded that the optimal level of issuance is 40% of GDP. The report found that if the issuance rate is 30% of GDP, CBDC can increase a country’s output by nearly 6% and achieve welfare benefits of over 2%. However, the author believes that the optimal policy outcome accounts for an even higher proportion of GDP, reaching 40%.
This CBDC issuance level is significantly higher than any currently proposed upper limit. For example, it is almost four times the upper limit of the digital euro being discussed. A report by Morgan Stanley in 2021 found that this would result in a loss of 873 billion euros in bank deposits. However, this high number is due to researchers predicting that consumers will not hold the majority of CBDCs. Their model predicts that the CBDC stock will increase to 30% of GDP overnight while commercial bank deposits will only decrease by 6%.

The Impact of CBDCs on Bank Deposits

The BIS report predicts that bank deposits will return to their levels within six years and grow by 21.5% in the long term. From the government’s perspective, the central bank has increased its government bond holdings by 30% of GDP, which means it is the main bondholder. On the other hand, banks convert a significant proportion of their government bond holdings into CBDCs.

The Benefits of CBDC Issuance

The issuance of CBDCs can bring a number of benefits to a country’s economy. It can provide a more efficient and secure mode of payment, reduce the costs of currency production and management, and promote financial inclusion by making banking accessible to all.

Challenges in Implementing CBDCs

Despite the potential benefits, there are also challenges in implementing CBDCs. Some of these include concerns over privacy, the potential for increased money laundering, the need for advanced technological infrastructure, and the impact on the role of commercial banks.

Conclusion

The introduction of retail central bank digital currencies (CBDCs) has the potential to bring a paradigm shift in the way we transact while providing numerous benefits to the economy. The BIS report’s conclusion that the optimal level of CBDCs is an issuance rate of 40% of GDP has far-reaching implications for policymakers and central banks worldwide. However, it’s important to take into account the challenges involved in implementing CBDCs before their full-scale introduction.

FAQs

1. What is the optimal level of CBDC issuance?
According to BIS economists, the optimal level of CBDC issuance is an issuance rate of 40% of gross domestic product (GDP).
2. What are retail central bank digital currencies (CBDCs)?
Retail central bank digital currencies (CBDCs) are digital currencies that are issued by central banks and represent the digital form of a country’s fiat currency.
3. What are the challenges in implementing CBDCs?
Some of the challenges involved in implementing CBDCs are concerns over privacy, the potential for increased money laundering, the need for advanced technological infrastructure, and the impact on the role of commercial banks.