To Demand or Not to Demand: On Quantifying the Future Appetite for CBDC

ToDemandorNottoDemand:OnQuantifyingtheFutureAppetiteforCBDC MarcoGrossandElisaLetizia WP/23/9 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 JAN ©2023InternationalMonetaryFundWP/23/9 IMFWorkingPaper MonetaryandCapitalMarkets ToDemandorNottoDemand:OnQuantifyingtheFutureAppetiteforCBDC AuthorizedfordistributionbyHirokoOuraJanuary2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Wesetupamodelofbanks,thecentralbank,thepaymentsystem,andthesurroundingprivatesectoreconomicenvironment.Itisastructural,choice-theoreticmodelwhichisdeeplyrootedindata.WeusethemodeltoconductastructuralcounterfactualthatintroducesaCentralBankDigitalCurrency(CBDC)whichisoptionallyinterest-bearing.ThemodelcanbeusedtoprovideestimatesoftheemergingCBDC-in-total-moneyshares,thedropofdepositratespreadstopolicyrates,theimpactonreserveneeds,theimpliedrotationofprofitsawayfrombankstowardcentralbanks,andtheextenttowhichmonetarypolicypass-throughmaybecomestronger.WeobtainupperboundestimatesfortheCBDC-in-moneysharesofabout25percentand20percent,respectivelyfortheU.S.andeuroarea,whenCBDCwouldberemuneratedatthepolicyratesandbeperceivedas“deposit-like”bythepublic.Actualtake-upmaylikelybebelowsuchupperboundestimates.Themodelcodes—toreplicateallresultsandtoapplythemtoothercountries—aremadeavailablealongwiththepaper. RECOMMENDEDCITATION:Gross,M.,andE.Letizia.2023.“ToDemandorNottoDemand:OnQuantifyingtheFutureAppetiteforCBDC.”IMFWorkingPaperNo.23/9,InternationalMonetaryFund,WashingtonDC. JELClassificationNumbers: C63,C73,E4,E5 Keywords: Centralbankdigitalcurrency;bankfundingcosts;centralbankseigniorage;monetarypolicypass-through Authors’E-MailAddresses: mgross@imf.org,eletizia@imf.org IMFWORKINGPAPERSToDemandorNottoDemand:OnQuantifyingtheFutureAppetiteforCBDC WORKINGPAPERS ToDemandorNottoDemand:OnQuantifyingtheFutureAppetiteforCBDC PreparedbyMarcoGrossandElisaLetizia1 1ThepaperhasbenefittedfromvaluablecommentsandsuggestionsfromtheparticipantsofseminarsattheIMF,withtheEuropeanCentralBank,BankofEngland,BankofCanada,ReserveBankofAustralia,BoardofGovernorsoftheFederalReserveSystem,CentralBankofBrazil,BankofKorea,andBankofJapan.Forvaluablediscussionsandcomments,wethankAtaiAgur,ChristophBertsch,MartinČihák,ShafiqGhawi,ReimoJuks,ArgyrisKahros,InutuLukonga,SahraSakha,ManmohanSingh,andGabrielSoderberg.TheviewsexpressedinthispaperarethoseoftheauthorsanddonotnecessarilyrepresentthoseoftheInternationalMonetaryFund(IMF). IMFWORKINGPAPERSToDemandorNottoDemand:OnQuantifyingtheFutureAppetiteforCBDC Contents 1.Introduction………………………………………………………………………………………………………5 2.Literature………………………………………………………………………………………………………...6 3.TheModel………………………………………………………………………………………………………..8 3.1TheStock-FlowConsistentGroundingfortheModel…………………………………………………8 3.2SequenceofAgent(Inter-)ActionsintheModel………………………………………………………9 4.ModelParameterizationandEstimation……………………………………………………………………...15 5.CounterfactualSimulations:IntroducingaCBDC…………………………………………………………...17 6.DiscussionandConclusions………………………………………………………….………………………..23 AnnexI:ThompsonSampling-BasedReinforcementLearningofNashEquilibriumDepositRates......26 AnnexII:SamplingChoiceSignalsfromNestedConditionalLogitModels……………………………....31 AnnexIII:DependenceofModelDynamicsonModelParameters………………………………….….….32 AnnexIV:EmpiricalEstimationandModelCalibration……………………………………………….….…..34 AnnexV:DetailedCounterfactualSimulationResultsfortheU.S.andtheEuroArea…………….….…38 References……………………………………………………………………………………………………………50 1.Introduction Howwouldeconomicdynamicsbeaffectedwhenintroducingacentralbankdigitalcurrency(CBDC)?Thisheadlinequestionoughttobeaddressed,amidthestronglyrisinginterestinCBDCoverrecentyearsandthepotentiallysubstantivechangeitwouldimplyforfinancialsystemarchitectureandmacroeconomicdynamicsatlarge.Weaskfivequestionsthatwethinkarecrucialunderlyingcomponents: (1)WhatCBDC-in-total-moneyshareswouldemerge?(2)Towhatextentwouldbankdepositrate-to-policyratespreadsfall?(3)Howmuchwouldbankreserveborrowingneedsriseinlieuoffallingdepositbalances? (4)Howwouldbankandcentralbankinterestincomeandexpenses(andnetseigniorage)beaffectedviavolumeandpriceeffects?(5)Towhatextentwouldmonetarypolicypass-throughbecomestronger? Wedeviseanovelmodelthatcanhelpanswerthesequestionsquantitatively.Itcomprisesbanks,acentralbank,andtheprivatesector(individual“non-bank”agents).ThemodelsimulatestheirintegratedbalancesheetsandfinancialflowsandallowsustoconductCBDCcounterfactualanalyses.Itcombineselementsof(1)choicetheory(utilitymaximization;LuceandSuppes1965),(2)gametheory(Nashequilibriaandstochasticgames;Nash1951andShapley1953),(3)industrialorganization(pass-throughpricin