Should Central Banks Issue Digital Currency?

The article analyzes the macroeconomic effects of introducing a central bank digital currency (CBDC) in an economy where both physical currency and private bank deposits serve as media of exchange. It identifies key policy tradeoffs: a cash-like CBDC that substitutes physical currency can enhance financial inclusion but may facilitate illicit activities, while a deposit-like CBDC that competes with bank deposits can improve exchange efficiency but risks crowding out bank deposits, raising banks’ funding costs, and reducing investment. The study distinguishes between targeted CBDCs—designed to substitute only one form of payment—and a universal CBDC usable in all transactions, showing that while targeted CBDCs allow more precise policy calibration, a universal CBDC often remains welfare-improving despite constraints. Additionally, central bank lending to banks does not mitigate the disintermediation caused by a deposit-like CBDC. Overall, the findings provide conditions under which different CBDC designs raise welfare and highlight the importance of balancing liquidity provision, financial inclusion, and investment efficiency in CBDC policy design.