The introduction of a central bank digital currency (CBDC) could significantly boost gross domestic product, new research from the Bank of England suggests.
The BofE's deputy governor of monetary policy Ben Broadbent appears before the Lords economic affairs committee on Tuesday to talk about a possible 'Britcoin' — a universally accessible and interest-bearing central bank liability, implemented via distributed ledgers, that competes with bank deposits as medium of exchange.
In their paper, his colleagues at the bank, John Barrdear and Michael Kumhof, say that such a plan could have major economic benefits, with issuance of 30% of GDP, against government bonds, potentially permanently raising GDP by as much as three per cent.
The paper acknowledges that with no historical experience and therefore data for empirical work it is difficult to calculate the possible benefits and costs of a CBDC. However, using a DSGE model calibrated to match the pre-crisis United States, they reach the thre per cent conclusion based largely on reductions in real interest rates, distortionary taxes, and monetary transaction costs.
Earlier this year Broadbent floated the idea of using distributed ledger technology to enable individuals to hold digital currency accounts with the central bank. In a speech at the London School of Economics he suggested a BofE account could be simply 'e-cash' that can only be used for retail transfers, or it could be a proper account that pays interest.
However, he warned that such a move would have far-reaching consequences for the commercial sector. On one hand it would make banks safer by reducing the risk of a run if a shock causes people to try to close accounts. However, he warned, taking deposits away from banks could make it harder for them to make loans and make them more reliant on wholesale markets.
The deputy governor's colleague, Andy Haldane, has also been exploring the issue, floating the prospect of abolishing paper cash and replacing it with a state-backed digital currency as a way of facilitating negative interest rates.
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