Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems

March 17, 2023

Preview Citation

Format: Chicago

Inutu Lukonga. Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems, (USA: International Monetary Fund, 2023) accessed December 22, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Central bank digital currencies (CBDCs) promise many benefits but, if not well designed, they could have undesired consequences, including for monetary policy. Issuing an unremunerated CBDC or a wholesale CBDC does not change the objectives of monetary policy or the operational framework for monetary policy. CBDCs can, however, induce changes in the retail, wholesale and cross border payments that have negative spillover effects on monetary policy, through their effects on money velocity, bank deposit disintermediation, volatility of bank reserves, currency substitution, and capital flows. Countries most vulnerable are those with banking systems dominated by small retail deposits and demand deposits, low levels of digital payments and weak macro fundamentals. Proposed CBDC design features, such as caps on CBDC holdings and unremunerating the CBDC can moderate disintermediation risks, but they are not sufficient. Central banks will need to ensure that unintended macroeconomic risks are comprehensively identified and mitigated.

Subject: Central Bank digital currencies, Commercial banks, Financial institutions, Financial services, Islamic banking, Monetary base, Money, Technology, Velocity of money

Keywords: CBDC, CBDC Pilots, Central Bank Digital Currencies, Commercial banks, Deposit disintermediation, Design option, Global, Impact monetary policy implementation, Islamic banking, Islamic Finance, Monetary base, Monetary Policy, Monetary policy implication, Unremunerated CBDC, Velocity of money

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/060
Stock No:

WPIEA2023060
ISBN:

9798400236532
ISSN:

1018-5941

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