The case for convenience: how CBDC design choices impact monetary policy pass-through

BIS Working Papers  |  No 1046  | 
07 November 2022



More and more central banks are transitioning from thinking about central bank digital currencies (CBDCs) in conceptual terms to considering a launch. Attention has shifted from high-level monetary policy and financial stability considerations to country-specific design and policy interactions.


This paper focuses on the monetary system of the United States, which is characterised by large excess reserves, and in which the main monetary policy tool of the central bank is the rate of interest on reserves (IOR). We explore how the introduction of a CBDC that offers payment convenience and potentially pays interest might affect how changes in the IOR rate feed through to deposit rates. Our model accounts for differences in depositor benefits and loan costs across banks of different sizes.


Large banks have a competitive advantage that the introduction of a CBDC could amplify or reduce, depending on the design choices. A highly convenient CBDC produces sufficient competitive pressure in deposit markets to raise deposit rates for any given level of IOR and increases the responsiveness of deposit rates to IOR rate changes. Increasing payment convenience also has favourable effects on market composition by levelling the playing field. Paying interest on CBDC balances increases deposit rates but is arguably a less desirable policy since this action increases the inequality of market shares and can weaken the responsiveness of deposit rates to IOR rate changes. The conclusion is that payment convenience is a crucial aspect of CBDC design that may be more desirable than paying interest on CBDC balances.


Banks of different sizes respond differently to interest on reserves (IOR) policy. For low IOR rates, large banks are non-responsive to IOR rate changes, leading to weak pass-through 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 greater inequality 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.

JEL classification: E42, G21, G28, L11, L15.

Keywords: central bank digital currency, interest on reserves, payment convenience, deposit rates, bank lending.