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Special Topics: Digital Currencies

Paper Session

Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)

Marriott Rivercenter, Grand Ballroom Salon I
Hosted By: American Finance Association
  • Chair: Andreea Minca, Cornell University

The Digital Economy, Privacy, and CBDC

Peter Hoffmann
,
European Central Bank
Toni Ahnert
,
European Central Bank
Cyril Monnet
,
University of Bern

Abstract

We develop a model of financial intermediation, payment choice, and privacy in the digital economy. While digital payments enable merchants to sell goods online, they also reveal information to their bank. By contrast, cash guarantees anonymity, but limits distribution to less efficient offline venues. In equilibrium, merchants trade off the efficiency gains from online distribution (with digital payments) and the informational rents from staying anonymous (with cash). The introduction of central bank digital currency (CBDC) raises welfare by reducing the privacy concerns associated with online distribution. Payment tokens issued by digital platforms crowd out CBDC unless the latter facilitates data-sharing.

The Demand for Programmable Payments

Charles Kahn
,
University of Illinois
Maarten van Oordt
,
Vrije Universiteit Amsterdam

Abstract

This paper studies the desirability of programmable payments where transfers are automatically executed conditional upon preset objective criteria. We do so by studying optimal payment arrangements in a framework that captures a wide range of economic relationships between two parties. The results show that the optimal payment arrangements for long-term economic relationships consist predominantly of simple direct payments. Direct payments increase the surplus by avoiding the liquidity cost of locking-up funds from the moment where the payer commits the funds in a programmable payment until the moment where the conditions are satisfied to release those funds to the payee. Programmable payments will be desirable, and may in fact be the only viable payment arrangement, in situations where economic relationships are of a short duration. Our results identify a limit to the growth in the demand for payments as their cost decreases: While the number of feasible trading relationships will increase, existing trading relationships will optimally rely on fewer payments.

CBDC and Banks: Threat or Opportunity?

Martina Fraschini
,
University of Luxembourg
Luciano Somoza
,
ESSEC Business School
Tammaro Terracciano
,
IESE Business School

Abstract

We study how banks react to the introduction of a Central Bank Digital Currency (CBDC) when households have heterogeneous preferences. We find that banks increase their deposit interest rates in response to a CBDC, even when the CBDC pays no interest rate. However, when the central bank provides funding to offset the loss in deposits, banks optimally push households towards the CBDC by reducing deposit interest rates. This allows them to liquidate reserves, reduce their cost of funding, and increase their profits. We calibrate the model to provide quantitative estimates of these mechanisms.

Discussant(s)
Andreea Minca
,
Cornell University
Paolo Guasoni
,
Dublin City University
Philip Dybvig
,
Washington University in St. Louis
JEL Classifications
  • G0 - General