Fed paper looks at theoretical role of remuneration, convenience in CBDC design
The importance of remuneration in the design of a central bank digital currency (CBDC) was emphasized in a paper the United States Federal Reserve Board released Nov. 17. The paper, part of the Fed’s Finance and Economics Discussion Series, reviewed the theoretical literature on CBDCs in large, developed economies, with a particular view to the United States. It looked at the risks and benefits to the banking system of introducing a CBDC, with particular focus on the role of CBDC design in the implementation of monetary policy, and remuneration, that is, payment of interest, as a critical design feature.
A CBDC could help control bank disintermediation resulting from the introduction of a CBDC, the authors found, and it can help in the management of the Fed’s balance sheet by making the holding of CBDCs more or less attractive relative to bonds. The authors concluded that, “Remuneration is arguably the key design feature that any central bank would want to contemplate.” They went on to say:
“A CBDC that pays no interest is consigned to the role of a medium of exchange; its value would be determined almost entirely by the convenience it would render. […] A remunerated CBDC, on the other hand, would be more attractive as a store of value, and its rate of remuneration could serve as an additional policy tool.”
Interest can be proportional, expressed as a percentage, or tiered, with the rate rising or falling nonlinearly as a policy tool, such as relatively to the size of the holding.
Related: NY Fed launches 12-week CBDC pilot program with major banks
The paper also considered convenience as a quality of a CBDC that can be manipulated for policy purposes:
“If a CBDC pays no interest, its use as a store of value is circumscribed … In such circumstances, CBDC is much like cash, and its usage would be determined by how much convenience it provides, relative to its money-like rivals.”
Source: Read Full Article