• Dr. Michael Kumhof

    Michael Kumhof is Senior Research Advisor in the Research Hub of the Bank of England. Before that, he was Deputy Division Chief, at the Modeling Division in the Research Department at the International Monetary Fund (IMF) (2004 to 2015). Kumhof was responsible for developing the Global Integrated Monetary and Fiscal Model of the IMF which is used at several central banks, for IMF policy and scenario analyses, for the World Economic Outlook, and for G20 work. Before that, he was Assistant Professor at Stanford University (1998 to 2004). His research focuses on the role of banks in the economy and on different monetary systems.

Central Bank Digital Currencies – Benefits versus Costs

We study the macroeconomic consequences of issuing central bank digital currency (CBDC) — a universally accessible and interest-bearing central bank liability, implemented via distributed ledgers, that competes with bank deposits as medium of exchange. In a DSGE model calibrated to match the pre-crisis United States, we find that CBDC issuance of 30% of GDP, against government bonds, could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distortionary taxes, and monetary transaction costs. Countercyclical CBDC price or quantity rules, as a second monetary policy instrument, could substantially improve the central bank’s ability to stabilise the business cycle.

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Central bank digital currencies — design principles and balance sheet implications

This paper sets out three models of central bank digital currency (CBDC) that differ in the sectors that have access to CBDC. It studies sectoral balance sheet dynamics at the point of an initial CBDC introduction, and of an attempted large-scale run out of bank deposits into CBDC. We find that if the introduction of CBDC follows a set of core principles, bank funding is not necessarily reduced, credit and liquidity provision to the private sector need not contract, and the risk of a system-wide run from bank deposits to CBDC is addressed. The core principles are: (i) CBDC pays an adjustable interest rate. (ii) CBDC and reserves are distinct, and not convertible into each other. (iii) No guaranteed, on-demand convertibility of bank deposits into CBDC at commercial banks (and therefore by implication at the central bank). (iv) The central bank issues CBDC only against eligible securities (principally government securities). The final two principles imply that households and firms can freely trade bank deposits against CBDC in a private market, and that the private market can freely obtain additional CBDC from the central bank, at the posted CBDC interest rate and against eligible securities.

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