Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics
We analyze the introduction of retail central bank digital currency (CBDC) into a two-tiered monetary system. Deposits, reserves, and CBDC differ in terms of operating costs and liquidity. We identify the optimal monetary system and characterize first- and second-best policies that account for externalities and bank market power. Optimal spreads satisfy modified Friedman rules; deposits are taxed or subsidized; interest rates on reserves and CBDC differ; and the second-best policy targets the composition of real balances. With commensurate resource costs of single- and two-tiered payment systems the central bank can neutralize all macro effects of CBDC. But political constraints might prevent this and a two-tiered system requires higher taxes. The model implies implicit subsidies to U.S. banks of up to 1.5 percent of GDP.