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Central Bank Digital Currency and the Monetary Policy and Financial Stability Implications
Abstract
The chapter analyzes the implication of central bank digital currency (CBDC) issuance for financial stability and monetary policy. It was shown that widespread central bank digital currency adoption and usage may accelerate bank deposit to CBDC migration which could elevate liquidity risk in the banking sector, increase interest rate, reduce bank loan supply, lower bank profit, increase the likelihood of bank panic, and transmit financial stability risks to the financial system. Also, issuing a central bank digital currency can strengthen monetary policy transmission if there is effective coordination between the monetary policy rate and the central bank digital currency deposit rate. If done properly, changes in the central bank digital currency deposit rate will affect households and businesses and compel commercial banks to respond by adjusting their deposit rates too, thereby enhancing the interest rate channel of monetary policy.
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