A Federal Reserve Report Examines The Potential Impact Of CBDC On Monetary Policy.

The Federal Reserve of the United States issued a research on the potential effects of a retail central bank digital currency (CBDC) on monetary policy implementation in the United States on Tuesday. The article, titled “Retail CBDC and US Monetary Policy Implementation: A Stylized Balance Sheet Analysis,” was published in April.

The Federal Reserve article examined four scenarios that depict the potential effects of a retail CBDC on monetary policy from the perspectives of three stakeholder groups: the Fed, commercial banks, and US households.

The first scenario involves exchanging cash for CBDC, which had an effect on asset categorization at the Fed and in the household involved but had no effect on policy implementation. The next three situations demonstrated a cascade effect that began with individuals withdrawing a CBDC from a commercial bank after depositing the money as cash.

The scenarios went on to explore commercial banks’ reactions to the decline in cash reserves caused by CBDC withdrawals, assuming fixed-bank demand for reserves.

If those withdrawals result in a shortfall in reserves, banks can either sell particular securities or loans to replenish their cash holdings, or they can raise deposits by offering more attractive conditions on their products. This, in turn, might raise short-term interest rates and lower demand for CBDCs by keeping deposits in banks for longer periods of time.

If interest rates rise too quickly, the Fed could use the discount window and standing repo facility to temper them, and if that fails, reserve management purchases would be the next step. These technological operations are covered in depth.

The report demonstrated that “the potential effects on monetary policy implementation from a retail CBDC are highly dependent on the initial conditions of the Federal Reserve’s balance sheet,” according to the authors. Their research also highlighted how the Fed could manage the impact of retail CBDCs on monetary policy implementation using existing instruments.

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