Should Central Banks Issue Digital Currency?

Abstract We study how introducing a central bank digital currency affects equilibrium allocations and welfare in an environment where both deposits are used exchange. highlight important policy tradeoff: while tends to improve efficiency exchange, it may also crowd out deposits, raise banks’ funding costs, decrease investment. derive conditions under which targeted currencies, compete only with physical or welfare. If such currencies infeasible, we illustrate the tradeoffs that arise when issuing single, universal currency.