The importance of remuneration in the design of a central bank digital currency (CBDC) was highlighted in a document that the United States Federal Reserve Board published on November 17. The paper, which is part of the Federal Reserve’s Financial and Economic Discussion Series, reviews the theoretical literature on CBDCs in the large developed economies, with special attention to the United States. It discusses the risks and benefits to the banking system of introducing a CBDC, with particular attention to the role of CBDC design in the implementation of monetary policy, and remuneration, i.e., interest payments, as a critical design feature.
The authors found that a CBDC could help control bank disintermediation resulting from the introduction of a CBDC, and can help in managing the Fed’s balance sheet by making CBDC holdings 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 relegated to the role of a medium of exchange, its value would be determined almost entirely by the convenience it would provide. […] A remunerated CBDC, by contrast, would be more attractive as a store of value, and its type of remuneration could serve as an additional policy tool.”
Interest can be proportional, expressed as a percentage, or stepped, with a rate that increases or decreases non-linearly as a policy tool, for example, in relation to the size of holdings.
The document also considers desirability as a quality of a CBDC that can be manipulated for political purposes:
“If a CBDC does not pay interest, its use as a store of value is circumscribed… In such circumstances, the CBDC is much like cash, and its use would be determined by the convenience it provides, relative to its cash rivals. monetary type”.
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