Thread: Central Bank Digital Currency

1) Central banks prepare to issue their digital currencies. This will certainly be a revolution. However, change dynamics are not well understood. CBDC can be the tool to reduce high private sector leverage without sacrificing public debt.
2) First a misunderstanding: banks will do whatever they do now. They will continue to create money and debt under central bank digital currency (CBDC). They will just need more reserves because ordinary people can prefer to deposit their savings at the central bank.
3) CBDC enables monetary policy to conduct direct transfers. At the zero lower bound, this is good news for central banks. Nevertheless, they will need the authority from parliaments for direct transfers. This will raise questions about the boundaries of monetary policy.
4) A revolution could take place in financial reporting of CBs. CBDC should not be on the central bank balance sheets as Bitcoin and other digital currencies are on nobody's balance sheet. Thus, central banks could conduct transfers without raising private or public debt.
5) High private debt induces financial crises. At the time, central banks jeopardize financial stability by promoting leveraging. CBDC would resolve the over-indebted demand problem. Through an off-balance sheet CBDC, central banks can dampen private debt via direct transfers.

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