On Friday the Bank of England published new research concluding that a central bank digital currency (CBDC) would be compatible with, or even strengthen the effectiveness of, central bank monetary policy, adding to the viability of the Bank issuing digital cash, as proposed by Positive Money.
The research paper, ‘Broadening narrow money: monetary policy with a central bank digital currency’, finds that a CBDC won’t cause central banks to lose control of monetary policy, concluding that:
“under a universally accessible, account based CBDC, monetary policy could operate in much the same way as it currently does, guiding the economy through varying the rate of interest paid on balances of electronic central bank money and the aggregate quantity of that money. The untested nature of such a CBDC means that the impact on the monetary transmission mechanism is uncertain, but we believe the most likely consequence would be that CBDC would strengthen the monetary transmission mechanism, for a given change in policy instruments.”
A form of CBDC was recommended in Positive Money’s recent report on ‘The Future of Cash’, which called for the BoE to issue a digital version of pound sterling to accompany physical notes and coins. Effectively this would allow ordinary citizens to store money and make transactions risk free through an account at the central bank, rather than relying on private banks, which currently hold the majority of electronic money (and therefore the vast majority of total money) in the economy.
As the BoE’s research suggests, “CBDC also has the potential to enable more significant change in the toolkit” of central banks, including the introduction of forms of sovereign money creation, like helicopter money, as advocated by Lord Adair Turner. Because a CBDC would be universally accessible, it would give central banks an easy way of transferring money to the real economy without the need for the financial system as an intermediary, allowing a fairer and more effective alternative to conventional quantitative easing (QE). As the paper states: “In this way, QE can be more targeted, as the central bank can choose to alter the balance sheet of the non-bank or banking sector independently, as it sees fit.”
A CBDC would therefore present a stepping stone towards transforming the Bank of England so that it works for the real economy rather than a dysfunctional financial system, and we are excited to see that the Bank is publishing research on the subject confirming its viability.