ECB publishes Working Paper on the optimal quantity of CBDC in a bank-based economy

On 28 July 2022, the European Central Bank (ECB) published a Working Paper on the optimal quantity of CBDC in a bank based economy.

The paper provides evidence on the estimated effects of digital euro news on bank valuations and lending and finds that they depend on deposit reliance and design features aimed at calibrating the quantity of CBDC. The paper goes on to develop a quantitative DSGE model that replicates such evidence and incorporates key selected mechanisms through which CBDC issuance could affect bank intermediation and the economy.

The main contributions of the paper are:

• It provides empirical evidence on the impact of digital euro-related news on bank stock prices and lending behaviour.
• The ECB develops and calibrates a quantitative euro area DSGE model that accounts for such evidence and incorporates a selection of key transmission mechanisms through which CBDC can affect banks and the real economy.
• The ECB analyses a variety of welfare maximising CBDC policy rules. Such exercise allows the ECB to give a sensible range of values for the optimal amount of CBDC in circulation.