In a working paper published Thursday, the Bank of Canada’s S. Mohammad R. Davoodalhosseini states that introducing a central bank digital currency (CBDC) “can lead to an increase of up to 0.64 percent in consumption for Canada and up to 1.6 percent for the US, compared with their respective economies if only cash is used.”
At the moment, Davoodalhosseini says, a key question to the “many” central banks currently mulling the option of issuing a CBDC is whether cash and a digital form of fiat currency should co-exist, and if so, how to maintain an “optimal” monetary policy.
Based on detailed modeling and mathematical calculations, the researcher argues in the paper that a country’s economic welfare – at least for Canada and the U.S. – might be better off by substituting cash with a CBDC, provided implementation is not extremely costly.
“Having both cash and CBDC available to agents (consumers) sometimes results in lower welfare than in cases where only cash or only CBDC is available. This fact suggests that removing cash from circulation may be a welfare-enhancing policy if the motivation to introduce CBDC is to improve monetary policy effectiveness.”
The paper further states that, by introducing a CBDC, central banks could have a higher level of flexibility in adjusting current monetary policy…