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© 2022 International Monetary Fund
WP/22/85
IMF Working Paper
Monetary and Capital Markets Department
Digital Money and Central Bank Operations Charles Kahn, Manmohan Singh, and Jihad Alwazir
May 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: The rise of new and proposed monetary vehicles, including CBDC, stablecoins, payment service providers etc., are unprecedented. An important question for central banks is the extent to which these innovations upend the role of and implementation of monetary policy. The paper focuses on the interest rate channel and if digital money (especially CBDC) will change monetary policy and central bank operations. We argue that new policy instruments make sense only to the extent that there is limited substitutability between the various payment sectors. We analyze trends in currency-in-circulation, and how it may impact central bank’s seigniorage, monetary base, and transactional velocity of digital money if money demand declines. Liquidity outside the monetary base will also be important to understand.
| JEL Classification Numbers: | E5; E41; G15; F30 |
| Keywords: | Base money; CBDC; central banking operations; currency in circulation; digital money; mobile phone operators; seigniorage. |
| Author’s E-Mail Address: | cmkahn@illinois.edu; msingh@imf.org; jalwazir@imf.org |
| JEL Classification Numbers: | E5; E41; G15; F30 |
| Keywords: | Base money; CBDC; central banking operations; currency in circulation; digital money; mobile phone operators; seigniorage. |
| Author’s E-Mail Address: | cmkahn@illinois.edu; msingh@imf.org; jalwazir@imf.org |
Title Page
WORKING PAPERS
Digital Money and Central Bank Operations
Prepared by Charles Kahn, Manmohan Singh, and Jihad Alwazir1
Contents
Introduction
I. Payments Assets, Old and New
II. Interest Rate Channel
III. New Instruments for Other Goals
IV. Central Bank Operational Issues
V. Payment Service Providers and Demand for Money
VI. Conclusion
References
BOXES
1. Types of Central Bank Digital Currency
2. Stablecoins are Money if Backed by Central Bank Reserves
3. Demand for Money and Seigniorage
4. Demand for Money and Sterilization
FIGURES
1. Seigniorage and Base Money Changes
2. Currency in Circulation and Monetary Base—Trends (2007–2020)
The authors would like to thank Peter Stella, Karl Habermeier, Simon Gray, and Adrian Armas for comments. Authors are responsible for any errors.