The Bank of England has just released its most significant paper yet. Macroeconomics of central bank issued digital currencies, by John Barrdear and Michael Kumhof, discusses the consequences of the central bank making a digital form of cash available to the general public, so that they are no longer forced to use bank deposits to make electronic payments:

“We study the macroeconomic consequences of issuing central bank digital currency (CBDC) — a universally accessible and interest-bearing central bank liability, implemented via distributed ledgers, that competes with bank deposits as medium of exchange. In a DSGE model calibrated to match the pre-crisis United States, we find that CBDC issuance of 30% of GDP, against government bonds, could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distortionary taxes, and monetary transaction costs. Countercyclical CBDC price or quantity rules, as a second monetary policy instrument, could substantially improve the central bank’s ability to stabilise the business cycle.”

The paper is based on a complex economic model in which anyone can hold money at the central bank, fully risk-free, as an alternative to bank deposits (money created by banks).

The first 16 pages are written in plain English and well worth a read, although the model itself (pages 17-50) will be hard-going or even unintelligible unless you’ve studied DSGE modelling approach and high-level maths. The results section, from page 50 onwards, are more technical than the intro but still free of equations.

We’re working through the paper in detail to understand the findings and what they imply for our work on a sovereign money system. However, here are some highlights from the introductory section: