Implications of Financial Architecture Change

Abstract:

We analyze change in the financial architecture due to retail CBDC and new private currencies. We derive conditions for "neutral" change without effect on the allocation or the price system, and we identify causes of non-neutrality related to payment preferences; fiscal instruments; technology; deposit complementarities; political frictions; and the mode of liquidity injection. Effects of private currencies are harder to offset than of CBDC. Our analysis provides a unifying perspective on CBDC models. It values central bank lender-of-last-resort guarantees for banks at 0.25% of GDP for the U.S.

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