In a recent publication, the Federal Reserve published a field guide to monetary policy implementation issues in a new world with central bank digital currency (CBDC), stablecoins and narrow banks.
The paper develops an analytical framework aimed at shedding light on the implications of the evolution of financial market structure for monetary policy implementation and transmission and focuses, in particular, on the implications of introducing new types of fixed rate financial assets in the financial system including retail and wholesale central bank digital currency (CBDC), stablecoins issued by narrow nonbanks, and deposits issued by narrow banks.
The analysis also provides a crude way of capturing some of the effects of bank capital and liquidity regulation on financial intermediation and monetary policy implementation. Perhaps the most important conclusion is that the introduction of new fixed rate assets by the Federal Reserve or by other financial intermediaries can have significant effects on equilibrium interest rates and patterns of financial intermediation and may also affect the potency of monetary policy tools. These effects are most pronounced when new financial assets are close substitutes for existing financial assets.
Also, the Bank of England (BoE) announced it was moving onto a second phase of CBDC development. Among the goals is to deepen the BoE and finance ministry’s understanding of how such technologies might be deployed in wholesale payments and settlements. Given that digital currency technologies are likely to be significant in shaping the future of finance, the benefits of the design phase can be expected to endure even if a decision is taken not to introduce a digital pound.