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Navigating Negative Interest Rates: The Role of CBDCs in Reshaping Monetary Policy
by Digital Euro Association on Jul 2, 2024 12:59:57 PM
The prospect of central bank digital currencies (CBDCs) emerges as a transformative force capable of reshaping our understanding of monetary policy and its instruments. The recent study, "Assessing the Effective Lower Bound in the Context of Introducing the Digital Euro," by authors Michael Pirgmann and Petr Wawrosz, investigates the implications of introducing CBDCs, particularly in the context of negative interest rate policies (NIRPs) and their effect on the effective lower bound (ELB).
CBDCs represent a digital form of sovereign currency, promising enhanced financial inclusion, efficiency, and transparency. However, their introduction carries profound implications for monetary policy (MP), potentially altering the established dynamics of the ELB—a critical threshold in economics which denotes the point where lowering nominal interest rates further fails to stimulate economic activity.
This comprehensive article delves into the crux of how CBDCs might shift the ELB closer to zero by providing an economic alternative perceived by agents as less costly and risky compared to holding cash. It explores the essential factors—costs, security, privacy, and overall preferences—determining the demand for CBDCs versus cash in NIRP scenarios. The study also examines how the implementation of CBDCs could affect the ELB, drawing upon theoretical models, surveys, and Monte Carlo simulations to predict the evolution of the ELB for the eurozone over the next decade.
Key Highlights Include:
- The ELB Concept: Understanding the limitations of current monetary policy strategies under NIRP conditions and the role of CBDCs in potentially lowering the ELB threshold.
- Design Matters: How the choice of CBDC design could decisively end the effectiveness of NIRPs by offering economic agents a more convenient option than cash for avoiding negative interest rates.
- Empirical Evidence: The article reviews the ELB levels in countries with NIRP history, indicating that the real ELB lies below the traditionally assumed zero or negative thresholds.
- Agent Preferences: Insights into the factors influencing individuals' preferences for cash versus CBDCs in NIRP situations and the broader implications for financial stability and economic growth.
As the digital euro's prospects spark debates and explorations, this study stands as a significant contribution to understanding the intricate dynamics between digital currencies and monetary policy's foundational concepts. The introduction of CBDCs not only challenges our traditional precepts about financial instruments but also opens up new avenues for fostering economic resilience in the face of negative interest rates.
For a deeper dive into the findings and implications of this cutting-edge research, read the full article here.
This article was prepared by the author/s. The views expressed in this article are the author’s own and do not necessarily reflect the views of the Digital Euro Association.
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