Events

Prof. Haoxiang Zhu
Gordon Y Billard Professor of Management and Finance
Associate Professor of Finance
MIT Sloan School of Management

We explore the implications of adding an interest-bearing central bank digital currency (CBDC) through commercial banks that differ in size. The large bank gives depositors a convenience value and hence possesses market power. As the interest on reserves (IOR) rate increases, the small bank gains market share in the deposit market and may increase lending. The interest rate on CBDC puts a lower bound on banks’ deposit interest rates, which is particularly binding on large banks. For low CBDC interest rates, the large bank deposit interest rate does not depend on the CBDC interest rate. However, as the CBDC interest rate continues to increase, the large bank’s deposit interest rate eventually rises and the small bank loses deposit market share. Other outcomes in deposit and lending markets can be ambiguous. We also explore a “direct” CBDC that is offered by the central bank or a government agency. In that scenario, which fits the recent “Banking for All Act,” the CBDC interest rate needs to be sufficiently high to have any impact at all.