SMU SOE Seminar Series (October 2, 2025): How Should Central Bank Issue Digital Currency?

TOPIC:

ABSTRACT

This paper develops a micro-founded general equilibrium model of payments to study the optimal design of a retail central bank digital currency (CBDC) where both currency and bank deposits are used in exchange. In particular, I investigate the impact of a CBDC holding limit on equilibrium allocations, private bank intermediation, and welfare. If the holding limit is set within an intermediate range of values, then the CBDC coexists with physical currency and deposits at the intensive margin, crowds out deposits at a slower rate, and improves welfare. A calibration to the United States economy suggests this range lies between 37% and 82% of the optimal amount of CBDC held without distortion.

Click here to view the CV.