Template-Type: ReDIF-Paper 1.0
Author-Name: Rodney J Garratt
Author-X-Name-First: Rodney J 
Author-X-Name-Last: Garratt
Author-Name: Jiaheng Yu 
Author-X-Name-First: Jiageng 
Author-X-Name-Last: Yu
Author-Name: Haoxiang Zhu
Author-X-Name-First: Haoxiang
Author-X-Name-Last: Zhu
Title: The Case for Convenience: How CBDC Design Choices Impact Monetary Policy Pass-Through
Abstract: Banks of different sizes respond differently to interest on reserve (IOR) policy. For low IOR rates, large banks are non-responsive to IOR rate changes, leading to weak pass-though of IOR rate changes to deposit rates. In these circumstances, a central bank digital currency (CBDC) may be used to provide competitive pressure to drive up deposit rates and improve monetary policy transmission. We explore the implications of two design features: interest rate and convenience value. Increasing the CBDC interest rate past a point where it becomes a binding floor, increases deposit rates but leads to a wider divergence of market shares in both deposit and lending markets and can reduce the responsiveness of deposit rates to changes in the IOR rate. In contrast, increasing convenience, from sufficiently high levels, increases deposit rates, causes market shares to converge and can increase the responsiveness of deposit rates to changes in the IOR rate.
Length: 48 pages
Creation-Date: 2022-10
File-URL: https://www.bis.org/publ/work1046.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1046.htm
File-Format: text/html
Number: 1046
Keywords: central bank digital currency, interest on reserves, payment convenience, deposit rates, bank lending. 
Classification-JEL: E42, G21, G28, L11, L15.
Handle: RePEc:bis:biswps:1046