The Fed discussion paper reviews the literature on the effect of central bank digital currencies (CBDCs) in large, developed economies and publishes some conclusions on particular design elements.
In that context, the benefits of remuneration in the design of a central bank digital currency were highlighted in a paper published by the United States Federal Reserve Board on November 17. The paper is part of the Fed’s Finance and Economics Discussion Series, which reviews the theoretical literature on CBDCs in big and developed economies, with a specific view of the United States.
It focuses on the risks and benefits to the banking strategy of introducing a central bank digital currency, with a specific focus on the role of CBDC design in the implementation of monetary policy and remuneration – payment of interest – as a crucial design feature.
Notably, a CBDC could assist in controlling bank disintermediation arising from its introduction, the authors discovered, and it can assist in the management of the Fed’s balance sheet by ensuring that the holding of CBDCs are more attractive than bonds. The authors conclude:
“Remuneration is arguably the key design feature that any central bank would want to contemplate.”
They went on to state:
“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, represented as a percentage, or tiered, with the rate surging or dropping nonlinearly as a policy tool, such as relative to the size of one’s holdings. The paper also considered convenience as a quality of a CBDC that can get 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.”
