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Ulrich Bindseil and Richard Senner review recent macroeconomic approaches to retail central bank digital currencies (CBDCs), highlighting a disconnect between theoretical models and the practical, conservative issuance plans of central banks

Image courtesy of interviewee. October 30, 2024

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This video discusses the concept and implications of Central Bank Digital Currency (CBDC), highlighting its role in modernizing central bank cash for the digital age. It notes that central banks generally agree on the necessity of CBDCs to adapt to the growing prevalence of digital payments. The People's Bank of China (PBoC) is cited as a leading example of CBDC deployment, having begun efforts around 2014, significantly ahead of other central banks such as the European Central Bank (ECB), which started its initiatives around 2020.

Academic interest in CBDCs has surged, with thousands of papers published discussing their macroeconomic impacts. This video summarizes findings from various research papers that explore the economic effects of CBDCs, including their potential to stabilize business cycles and increase overall output. However, it points out that many academic models often make assumptions that do not align with central banks' actual proposed designs for CBDCs, particularly regarding the remuneration of CBDC, which most central banks have decided against implementing.

The discussion asserts that the current design of CBDCs, which does not allow for remuneration and imposes limits on access, mitigates potential financial stability risks. Nonetheless, the author expresses skepticism about the macroeconomic impacts of CBDCs, predicting negligible effects or suggesting that by merely introducing CBDCs, some central banks might maintain balance between central and private money without significant alteration to the financial system.

In summary, while there is a great opportunity for research into CBDCs, the author argues that many existing studies may not be entirely applicable or accurately representative of the real-world implications of CBDCs as currently designed. The future impact of CBDCs remains uncertain and will depend on how central banks adapt to changing economic contexts and technological advancements.

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Here are five key points from the video about central bank digital currencies (CBDCs):

1. **Modernization of Currency**: Central banks are working to modernize banknotes through CBDCs, aiming to provide a digital alternative that fits the contemporary landscape of digital payments, which have been widely adopted globally, particularly through smartphones and biometric recognition systems.

2. **Global CBDC Developments**: The People's Bank of China is leading in CBDC deployment, having made significant progress since 2014, which includes deploying hundreds of millions of wallets to enable digital currency transactions. This trend suggests a shift in consumer preferences towards digital payment methods and the relevance of central bank money alongside private money in retail payments.

3. **Academic Interest and Findings**: There has been a substantial increase in academic research on CBDCs, with over 1,000 papers published between 2016 and 2020 and more than 2,000 in the past year. Various studies predict significant macroeconomic effects from CBDC implementation, such as smoothing responses to economic shocks, increasing overall output, and potentially impacting interest rates and banking stability.

4. **Debate on Remuneration**: A critical debate exists regarding whether CBDCs should be remunerated (i.e., pay interest). Most central banks appear to favor non-remunerative designs to avoid public concerns about negative interest rates and to prevent undermining traditional banking structures, which could result in decreased bank deposits and heightened central bank involvement in the economy.

5. **Need for Updated Economic Models**: The current literature on CBDCs may be misleading due to existing economic models rooted in outdated paradigms that do not fully capture the dynamics of modern monetary systems. There is a call for developing new models that account for the specificities of CBDC, banking interactions, and the broader economic landscape, recognizing that traditional analyses may not apply well to CBDCs as they evolve.

These points collectively highlight the significance, challenges, and ongoing research related to the implementation and potential impact of CBDCs within contemporary financial systems.

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Here are some key quotes from the video you about Central Bank Digital Currencies (CBDCs):

1. **Modernizing Currency:**
- "CBDC is about, you know, basically modernizing bank notes, making them fit for the digital age."

2. **Adoption Trends:**
- "The trend is clearly there. So if having Central Bank money co-exist with private money in retail payments was a good idea in the past, it's likely to be a good idea in the future."

3. **China's Progress:**
- "The People's Bank of China... they have... hundreds of millions of wallets being deployed and active to some extent. So they're the most advanced."

4. **Academic Research Growth:**
- "Between 2016 and 2020, more than 1000 papers have been written on central banks and models... last year alone, more than 2000 such papers were added."

5. **Significant Macroeconomic Effects:**
- "Many papers find very large macroeconomic effects... for example, they find that CBDC can help smooth responses to macroeconomic shocks."

6. **Optimal Quantity of CBDC:**
- "In the Euro area, for example, the optimal amount of CBDC is something between 15 and 45% of GDP."

7. **Design Choices and Remuneration:**
- "75% of the papers already... miss the point on remuneration... central banks have all... said, we will not remunerate that stuff."

8. **Macro vs. Micro Economic Models:**
- "The models are really about an assumed increase in total central bank money in circulation... CBDC is a reaction to the decline of bank loans."

9. **Financial Stability Concerns:**
- "If we step back, in principle, what central banks want to achieve is to preserve the role of central bank money."

10. **The Future of CBDC:**
- "The future's uncertain, but what is not uncertain is that the microeconomic literature's conclusions are not very convincing."

These quotes highlight the main themes of modernization, the significance of research, the implications for macroeconomic stability, and the central banks' intentions surrounding the design and implementation of CBDCs.

X-TIMESTAMP-MAP=LOCAL:00:00:00.000,MPEGTS:90000

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Central banks.

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Banks have communicated, I would say,

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overall in a similar way, that,

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CBDC is about, you know,

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basically modernizing bank notes, making them fit

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for digital, age.

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And, you know, we have seen a lot of financial instruments

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and payment instruments, which were on paper in the past,

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having moved to digital.

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And one could say Central Bank.

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Uh, cash bank notes are almost the last, you know,

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financial instrument on paper, and people use more

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and more digital everywhere in the world.

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We have this trend that, digital payments have become

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so convenient with smartphones

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and, I mean, biometric recognition that,

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the trend is clearly there.

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So if, if having Central Bank money co-exist

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with private money in,

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in retail payments was a good idea in the past, it's likely

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to be a good idea in the future, and

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therefore we should, modernize.

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So I think central banks view it this way.

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And, in terms of deployment, who has deployed it?

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I think the, the biggest, the outstanding, cases,

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the People's Bank of China, which, you know, where

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for a long time they had, two, private,

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e-money companies, if you want,

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dominating the retail payment market.

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And the central bank also saw a need

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to stay, stay in business.

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And they have, I started hard work, let's say in 2014,

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where we have at the ECB started in maybe 2020.

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So, they're way ahead

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and they, they have, already I hear hundreds of millions

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of, of wallets being deployed and active to some extent.

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So they're the most advanced

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Parallel to the work of, of central bank experts.

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Academics have also picked up the topic of CBDC, roughly

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around 2016.

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So to give you some,

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interesting numbers from Google Scholar, between 2016

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and 2020, more than 1000 papers have been written

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that contain the world's CBDC,

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central banks and and models.

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And last year alone,

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more than 2000 such papers were added so earlier,

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and I did not review all of them.

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We didn't even read all of them.

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Um, but we picked 14 papers

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that predict macroeconomic consequences of, CBDC.

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And we choose these 14 papers with the idea of

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covering a wide range of approaches.

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Um, and they're written by, renowned economists.

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So we believe that these 14 papers cover quite,

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quite well the, the overall literature.

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So one paper, for example,

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is called Should Central Banks Issue

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Digital, currencies.

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Another one is called What is, the Optimal Quantity

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of CBDC in a Bank based Economy.

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And yet another one, for example, is called CBDC when Price

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and Bank Stability collide.

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So these topics are big topics.

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They are important, questions that are addressed.

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And if you read these papers,

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maybe like some policy makers only the conclusions and,

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and the abstracts, then they have very, very outspoken,

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findings.

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So some papers find very large,

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many papers find very large macroeconomic effects.

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There's a 2023 paper by about it all,

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and they say if there's a moderate CBDC adoption, this leads

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to a transition from the floor

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to a corridor system of the Central bank.

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So they talk about the operational framework of,

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central banks,

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and many other papers talk about more macroeconomic

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variables like output in a 2023 paper by US and Maha

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and co-authors, for example, they find

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that CBDC can help smooth responses to macroeconomic shocks.

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Um, and similarly, a 2021 paper by Bari

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and Koff finds that CBDC can increase overall output

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and can stabilize the business cycle.

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So these are very, kind of positive, findings.

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Right? And as I mentioned earlier,

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some papers also asked the question,

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what is the optimal amount?

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There's a 2022 paper by co-authors,

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and they say in the Euro area, for example,

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the optimal amount of CBDC is something between 15

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and 45% of of GDP.

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So, so that's, that's quite large, right?

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And in a paper by geo at all,

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also from 2019, they find that

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introducing CBDC affects banks in very significant ways so

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that banks increase their balance sheet, they pay more

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interest rate on deposits,

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and they also provide more loans to the real economy,

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enhancing, growth.

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And one paper's may be worth mentioning

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because it's a macroeconomic paper,

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but does not find any macroeconomic effects,

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surprisingly, compared to many other papers.

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It's a 2019 paper by Meyer, and,

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and here you have large scale CBC,

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but no macroeconomic effects or even,

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because the assumption is

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that the central bank refinance all the outflows from,

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bank deposit.

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So that in the end, nothing,

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nothing significant is, is, is happening.

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So, so summing up, if you take this first, view of, of,

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of the literature, they really try

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to answer key policy questions,

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and many of them find very significant

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macroeconomic effects

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In a certain way, though the academic writers,

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have not, or,

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or they almost, you know, started the debate.

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So they come in even before center.

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I mean, at least at the very early stage, they started

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to write papers in which they took assumption on

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how CBDC specified, which never really matched,

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what central banks were saying, how they may want

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to do CBDC.

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So the, the biggest, you know, of those,

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deviating assumptions is on remuneration that,

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the majority of papers we review assumes remuneration

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because those macro economists, they, you know, like, like

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to see CBDC as a new, policy instrument.

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Now you have something that the household, you know,

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everybody holds directly

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and you can, change interest rate

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and your transmission of monetary policy is even more

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direct and effective.

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And also, you know, there's a very long debate, about,

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this anomaly, if you want that bank notes,

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financial asset that is always remunerated at zero

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regardless of whether,

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short term interest rates are 10%,

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or if they are even, you know, minus 1%,

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as we have seen in recent years, they are always at zero.

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So, you know, in a certain way, economists have been waiting

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for a change of technology where this would be overcome,

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and then you can play with the interest rate.

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Um, but it's not reality

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because, central banks have all, you know, really all

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of them who work on CCB D said,

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we will not remunerate that stuff.

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Um, and, and why do central banks have

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so little appetite for Remunerating?

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I think it's because remuneration would be very unpopular.

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Um, and, and I mean two, two types of actors, you know,

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hate the idea of remuneration first.

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Um, people, citizens are made to believe

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that remuneration could be misused for

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negative interest rates, financial repression,

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and the banks hate the idea

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that central CBDC could be remunerated positively

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because that would compete with their deposit collection.

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So all those people want tag,

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and central banks are pragmatic,

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and they say the main purpose is we want

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to provide a means of payment.

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I mean, replacing, I mean, coming in

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because people use bank notes less,

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we don't think we need another policy instrument.

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So that's how we specify no remuneration and even limits.

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So in a certain way, 75 of the pa percent

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of the papers already, you know, miss, the point

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because, they build those macroeconomic implications

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on, on remuneration.

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Um, and then those papers who don't look at remuneration

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or they admit their zero remuneration, they don't find,

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I think there's not a single one which finds a meaningful

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differentiation between cash and, and CBDC,

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because, you know, if,

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if you look at any macroeconomic model, cash

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and remunerated CBDC, I mean, it's the same, you know,

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and, and no, no, no one, you know, we zoomed into what,

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what are those people telling us?

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How in their model is, is cash different from CBDC?

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And never you find a meaningful, explanation.

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So what the models are really about then is an in an assumed

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increase in total central bank money in circulation.

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So, you know, they just assume,

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now we have a 1.5 trillion bank notes in the Euro area,

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then come CBDC, it will be enormous,

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it will be another trillion.

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What is the effect of just increase of this increase

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of central bank money circulation?

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So first, they're not modest of CBDC,

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but increase of central bank money.

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And second, this increases even, you know, wrong

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because, CBDC is a reaction to the decline

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of bank loans, the declining use,

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and it's only filling a gap that is created by that.

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So we, I I, I don't expect central bank money in circulation

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to be higher relative to GDP in let's say 20 years,

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even if we introduce CBDC,

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because, yeah, I think the, the fact

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that the way CBDC has been designed will lead to low volumes

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of CBDC, Bede will go down.

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00:10:22.005 --> 00:10:24.625
So the opposite of what those models who

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don't assume remuneration,

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be it the macroeconomic effects on

208
00:10:29.485 --> 00:10:33.265
If you want to take the, understand the results

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00:10:33.365 --> 00:10:36.465
and the, the plausibility of the results of these models.

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00:10:36.525 --> 00:10:38.625
On the one hand side, it's really about the kind

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00:10:38.625 --> 00:10:41.585
of design choices as, as mentioned.

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00:10:41.585 --> 00:10:44.865
And of course, researchers can study whatever design

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00:10:44.965 --> 00:10:48.345
and they should study a variety, variety of, of designs.

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00:10:48.925 --> 00:10:52.985
And then when central banks already specify current designs,

215
00:10:53.045 --> 00:10:56.505
it might make sense to refer to these designs

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00:10:56.565 --> 00:10:59.425
or take them maybe into account as, as some,

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00:10:59.935 --> 00:11:01.025
some benchmarks.

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00:11:01.765 --> 00:11:05.345
But I think our critique also, to some extent goes,

219
00:11:05.575 --> 00:11:09.385
goes further to the, to the models per se, how they are,

220
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how they are set up, the model,

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00:11:11.605 --> 00:11:15.385
the model worlds into which you incorporate CBDC overall.

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00:11:15.385 --> 00:11:17.625
Most of the models that we review, they're either

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of new monitors or new Cajun, type.

224
00:11:20.925 --> 00:11:23.345
We also have two, three outliers.

225
00:11:23.365 --> 00:11:25.785
We have a diamond and dip big type of model,

226
00:11:26.285 --> 00:11:29.425
and then we also have a stock flow consistent model.

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Um, all of these papers,

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00:11:32.245 --> 00:11:35.785
except the stock flow consistent models are their model is

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they, they are rooted in kind of the seventies, eighties,

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in the, in the big neoclassical revolution.

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And you can say there are two,

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two important paradigms in which they're rooted.

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First it's the, the micro foundations.

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So these papers, originally, these models typically assume

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that there's no money.

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You focus on the real economy.

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Uh, you focus on full competition, on, equilibrium,

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you focus on representative agents.

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So you don't really look at the aggregate,

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00:12:06.845 --> 00:12:09.365
but you look at an individual household or government

241
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and then take this as a representative for the whole,

242
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sector.

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00:12:15.625 --> 00:12:18.325
Now, regarding these micro foundations, most models have

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moved beyond these old school neoclassical models.

245
00:12:22.555 --> 00:12:23.885
They have,

246
00:12:24.355 --> 00:12:27.045
typically a separate financial sector, which is key.

247
00:12:27.275 --> 00:12:30.365
Many of these models also differentiate the central bank

248
00:12:30.635 --> 00:12:31.725
from the commercial bank,

249
00:12:32.015 --> 00:12:35.405
which is also very important if you want to talk about,

250
00:12:35.685 --> 00:12:36.725
CBDC, because much

251
00:12:36.725 --> 00:12:39.645
of the discussion is really about the impact on,

252
00:12:39.665 --> 00:12:41.405
on deposits and, and bank notes.

253
00:12:42.145 --> 00:12:43.365
But still, there are a couple of papers

254
00:12:43.365 --> 00:12:45.045
where you don't distinguish

255
00:12:45.625 --> 00:12:47.605
the central bank from the commercial banks.

256
00:12:47.605 --> 00:12:51.005
And then of course you can't make any, any statements

257
00:12:51.145 --> 00:12:55.045
by definition about, for example, bank runs the effects

258
00:12:55.065 --> 00:12:57.125
of different types of, of money.

259
00:12:57.125 --> 00:13:00.205
And then you probably should, state this clearly,

260
00:13:00.625 --> 00:13:03.245
but still then, even if you take the financial sector more,

261
00:13:03.435 --> 00:13:06.965
more seriously, it's important when you take this rather

262
00:13:06.965 --> 00:13:10.525
micro perspective view on the, on the economy to be aware

263
00:13:10.525 --> 00:13:12.005
of fallacies of composition.

264
00:13:12.745 --> 00:13:15.765
So one that, we saw on a couple of papers is

265
00:13:16.725 --> 00:13:18.815
that from an individual point of view,

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central bank money is great, right?

267
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It's the, the safest, credit money that exists

268
00:13:25.475 --> 00:13:28.375
and our monetary economists economies.

269
00:13:28.475 --> 00:13:31.495
And individually it might make a lot of sense

270
00:13:31.495 --> 00:13:32.895
to have large scale access.

271
00:13:33.265 --> 00:13:36.215
Every person individually would probably find it great

272
00:13:36.215 --> 00:13:39.095
to have an unlimited account at the central bank.

273
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Um, but then if you look at the system as a whole,

274
00:13:42.155 --> 00:13:45.495
if the central bank would open up the balance sheet for,

275
00:13:45.795 --> 00:13:48.295
to all citizens in an unlimited way,

276
00:13:48.925 --> 00:13:52.815
then you might destroy the very thing that you seek, right?

277
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Because then suddenly the central bank balance sheet becomes

278
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very large and this high credit quality, is, is diluted

279
00:13:59.175 --> 00:14:03.415
because many other assets have to be moved to the,

280
00:14:04.435 --> 00:14:06.415
to the central bank balance sheet.

281
00:14:06.755 --> 00:14:08.935
And another important paradigm

282
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where these models are rooted in is the money

283
00:14:11.175 --> 00:14:12.855
neutrality paradigm, paradigm.

284
00:14:12.965 --> 00:14:16.775
It's in the eighties, you don't have money, you have,

285
00:14:16.885 --> 00:14:19.055
basically a barter exchange economy.

286
00:14:19.955 --> 00:14:22.095
Um, now the models we reviewed,

287
00:14:22.095 --> 00:14:23.775
they typically deviate from this

288
00:14:23.875 --> 00:14:25.775
by including either frictions.

289
00:14:26.225 --> 00:14:28.175
These are then the, so-called new engine models,

290
00:14:28.955 --> 00:14:31.175
or they have some kind of decentralized markets

291
00:14:31.315 --> 00:14:32.775
and information asymmetries,

292
00:14:33.275 --> 00:14:35.375
but you need money in order to be active,

293
00:14:35.755 --> 00:14:37.015
on these markets.

294
00:14:37.065 --> 00:14:41.805
These are called the new monitors, models.

295
00:14:42.105 --> 00:14:43.525
So you have room for money, but,

296
00:14:43.525 --> 00:14:47.125
but you kind of start with a world, without money.

297
00:14:47.665 --> 00:14:50.165
And then finally, it's maybe worth mentioning that related

298
00:14:50.185 --> 00:14:51.765
to both of these, these paradigms.

299
00:14:52.385 --> 00:14:56.045
The root of these models is to typically look at equilibria.

300
00:14:56.065 --> 00:14:58.885
It, it's typically a static analysis.

301
00:14:59.065 --> 00:15:00.645
Of course, modern, modern models then

302
00:15:00.715 --> 00:15:01.885
move, move beyond this.

303
00:15:01.885 --> 00:15:04.005
But traditionally, they, they are rather,

304
00:15:04.155 --> 00:15:05.525
they take a static perspective.

305
00:15:05.525 --> 00:15:08.285
That's kind of the home, the home of these model.

306
00:15:08.285 --> 00:15:10.525
It's, you wanna find an equilibrium that is,

307
00:15:10.835 --> 00:15:12.005
that is stable, right?

308
00:15:12.545 --> 00:15:15.485
But then when we look into, CBDC

309
00:15:15.485 --> 00:15:17.885
as Ulrich mentioned in the beginning, we have,

310
00:15:18.405 --> 00:15:22.005
structural changes just going on in the payment sphere.

311
00:15:22.505 --> 00:15:24.725
And so, so the, the way bank notes

312
00:15:25.185 --> 00:15:29.525
and payments evolve over time, a very dynamic, process.

313
00:15:30.385 --> 00:15:33.365
And therefore it might make sense to use models

314
00:15:33.395 --> 00:15:36.885
that can really capture this, this dynamic.

315
00:15:37.665 --> 00:15:41.485
So a against this backdrop of, of the kind of the models

316
00:15:41.485 --> 00:15:44.405
that that are used, we think there's an opportunity

317
00:15:44.545 --> 00:15:48.005
for different types of CBDC models that do not start

318
00:15:48.005 --> 00:15:49.085
with the conet economy,

319
00:15:49.265 --> 00:15:53.205
but directly model the monetary capitalist economy

320
00:15:53.235 --> 00:15:54.445
that we are interested in

321
00:15:54.945 --> 00:15:59.485
and then really focus on on CBDC, on bank notes and deposits

322
00:15:59.485 --> 00:16:00.765
and the, the payments market.

323
00:16:01.305 --> 00:16:04.605
But nevertheless, of course, the, the modern location

324
00:16:04.825 --> 00:16:07.965
and monitors, new monitors models, they're very flexible.

325
00:16:08.385 --> 00:16:12.285
Um, many of these models, you can easily adjust the design

326
00:16:12.305 --> 00:16:14.605
and you can also easily extend them.

327
00:16:14.665 --> 00:16:16.445
You can, for example, then add a banking

328
00:16:16.445 --> 00:16:17.845
sector if you don't have one.

329
00:16:18.425 --> 00:16:19.605
Um, so far.

330
00:16:19.625 --> 00:16:23.735
So there's also room for making them some regards more

331
00:16:23.735 --> 00:16:26.415
and more realistic or adding dimensions that have

332
00:16:26.475 --> 00:16:29.775
so far not been, not been discussed.

333
00:16:29.795 --> 00:16:32.615
If we look at the design that is currently discussed as,

334
00:16:32.955 --> 00:16:36.655
as summarized by, by oli with, non remuneration

335
00:16:36.915 --> 00:16:40.575
and, access limits, then there's no concern

336
00:16:40.605 --> 00:16:41.975
regarding financial stability

337
00:16:41.975 --> 00:16:45.735
because the volumes are really, relatively small.

338
00:16:45.795 --> 00:16:46.815
Now, if we step back

339
00:16:46.815 --> 00:16:49.175
and in principle, what central banks want to achieve is

340
00:16:49.175 --> 00:16:51.055
to preserve the role of central bank money,

341
00:16:51.315 --> 00:16:53.735
and you could say, yeah, let's make it unlimited

342
00:16:54.355 --> 00:16:57.655
and let's remunerate it, make it accessible to,

343
00:16:57.795 --> 00:16:58.815
to, to everyone.

344
00:16:59.235 --> 00:17:04.055
But then central banks are rather careful regarding this

345
00:17:04.735 --> 00:17:07.015
approach because they want to avoid unintended side effects.

346
00:17:07.835 --> 00:17:11.935
And the key potential unintended side effect is really

347
00:17:12.635 --> 00:17:16.615
to have A-C-B-D-C that is then used as a store value in,

348
00:17:17.105 --> 00:17:18.405
in large quantities.

349
00:17:19.025 --> 00:17:22.405
And this would have, two, two effects.

350
00:17:22.535 --> 00:17:25.885
First you have a, a new destination for deposits.

351
00:17:26.105 --> 00:17:27.205
So in times of stress,

352
00:17:27.555 --> 00:17:30.485
many people would likely move them into cbdc

353
00:17:30.985 --> 00:17:33.605
and, reduce deposits in the banking system.

354
00:17:34.345 --> 00:17:37.605
And second, you thereby would increase the

355
00:17:37.605 --> 00:17:38.805
central bank balance sheet.

356
00:17:39.425 --> 00:17:43.625
And the central bank could, would in some way have

357
00:17:43.645 --> 00:17:46.385
to then refinance these deposit outflows.

358
00:17:46.885 --> 00:17:49.145
And by doing this, if they do this in a collateral

359
00:17:49.625 --> 00:17:51.885
collateralized way, they would've

360
00:17:51.885 --> 00:17:54.045
to accept certain assets from banks.

361
00:17:54.665 --> 00:17:56.885
And today, the, the lending facilities of,

362
00:17:56.905 --> 00:17:58.365
of central banks are really limited

363
00:17:58.545 --> 00:18:00.925
to high quality, collateral.

364
00:18:01.025 --> 00:18:02.765
But if you do this on a large scale,

365
00:18:02.765 --> 00:18:04.405
then suddenly the central bank,

366
00:18:04.825 --> 00:18:08.285
the central institution would've to conduct some kind

367
00:18:08.285 --> 00:18:10.845
of risk monitoring for almost the whole economy.

368
00:18:10.985 --> 00:18:13.085
So the footprint of the central bank on the economy

369
00:18:13.215 --> 00:18:14.445
would, would increase.

370
00:18:14.545 --> 00:18:18.085
And, central bank money, the way we know it,

371
00:18:18.105 --> 00:18:20.925
and the way it has been historically would be,

372
00:18:20.925 --> 00:18:23.445
would no longer, exist.

373
00:18:24.225 --> 00:18:25.325
So for the current design,

374
00:18:25.325 --> 00:18:27.845
therefore there are no financial stability implications.

375
00:18:27.865 --> 00:18:30.605
And then interestingly, come back to what we saw before.

376
00:18:30.625 --> 00:18:33.085
If you then look at parts of the literature,

377
00:18:33.475 --> 00:18:35.365
they have large scale access

378
00:18:35.365 --> 00:18:36.685
to the central bank balance sheet,

379
00:18:37.065 --> 00:18:40.365
but do not share any, financial stability concerns.

380
00:18:40.385 --> 00:18:43.565
And why is this? So in some papers, they simply assume

381
00:18:44.115 --> 00:18:46.845
that the central bank refinances everything

382
00:18:46.915 --> 00:18:48.165
from an accounting view.

383
00:18:48.185 --> 00:18:50.045
You can just say, okay, every out,

384
00:18:50.045 --> 00:18:52.805
every deposit outflow is mirrored by an,

385
00:18:52.945 --> 00:18:55.125
by an inflow from the, from the central bank.

386
00:18:55.825 --> 00:18:57.725
And if you then don't have a,

387
00:18:58.315 --> 00:19:00.285
have in your model the interaction

388
00:19:00.945 --> 00:19:03.485
or the value added of banks, if there's no value added

389
00:19:03.485 --> 00:19:05.645
of banks of this decentralized monitoring

390
00:19:05.665 --> 00:19:07.645
of the real economy,

391
00:19:08.505 --> 00:19:10.085
and the central bank could do it as well.

392
00:19:10.105 --> 00:19:12.525
And then you do not find any concerns

393
00:19:12.525 --> 00:19:13.805
of opening up the central bank

394
00:19:14.105 --> 00:19:16.965
or even, in, in this paper by Meyer

395
00:19:16.965 --> 00:19:19.965
and neighbor from 2019, they say, this could even enhance

396
00:19:20.845 --> 00:19:23.415
financial stability because suddenly you have the central

397
00:19:23.565 --> 00:19:27.015
bank as the largest at commercial banks,

398
00:19:27.315 --> 00:19:29.055
and they say the central bank will not run.

399
00:19:29.435 --> 00:19:32.215
So you have a, a very stable funding for,

400
00:19:32.315 --> 00:19:34.935
for commercial banks, this is one aspect in,

401
00:19:34.955 --> 00:19:38.095
in the literature where you have models

402
00:19:38.465 --> 00:19:41.375
where they run into the central bank, doesn't matter.

403
00:19:41.635 --> 00:19:44.095
And then there are other models, as I've mentioned earlier,

404
00:19:44.145 --> 00:19:47.015
where this run is just simply not possible by design.

405
00:19:47.595 --> 00:19:51.015
So in, in some models, CBDC can only be acquired in exchange

406
00:19:51.035 --> 00:19:54.695
for government bonds, for example, which is, which goes,

407
00:19:55.425 --> 00:19:58.815
which then is not A-C-B-D-C anymore, right?

408
00:19:59.155 --> 00:20:02.135
If you talk about CBC, then this is something like,

409
00:20:02.135 --> 00:20:05.095
like bank notes you want to acquire with your bank notes

410
00:20:05.115 --> 00:20:06.295
or with your deposits.

411
00:20:06.875 --> 00:20:10.215
Um, so making it available only through government bonds,

412
00:20:10.325 --> 00:20:12.255
it's a, it's a different financial instrument

413
00:20:13.115 --> 00:20:14.495
or as mentioned in other models,

414
00:20:14.675 --> 00:20:17.215
you simply don't have a banking system and

415
00:20:17.215 --> 00:20:20.055
therefore by definition, you cannot, you cannot have a run.

416
00:20:20.115 --> 00:20:24.255
So you can't find any adverse side effects of opening up

417
00:20:24.795 --> 00:20:27.375
the, the public central bank balance sheet.

418
00:20:27.755 --> 00:20:28.855
We can't learn

419
00:20:29.035 --> 00:20:31.655
so much from the macroeconomic literature, unfortunately.

420
00:20:33.035 --> 00:20:36.895
And, yeah, I, I think, you know,

421
00:20:36.955 --> 00:20:38.655
the question is, I mean, two things.

422
00:20:39.645 --> 00:20:43.615
What will really be the effect the macroeconomic effects

423
00:20:43.615 --> 00:20:48.285
of CBC as announced by, by central banks,

424
00:20:48.305 --> 00:20:53.085
and I would say, they will be negligible

425
00:20:53.105 --> 00:20:54.805
or not identifiable

426
00:20:55.185 --> 00:20:56.805
or in a certain way, you know,

427
00:20:56.905 --> 00:21:01.245
not introducing CBDC would have larger effects than

428
00:21:01.645 --> 00:21:04.685
introducing it, because if we don't introduce it,

429
00:21:04.785 --> 00:21:06.765
we look at Sweden for example,

430
00:21:07.225 --> 00:21:11.445
an economy which is very advanced in terms of digitalization

431
00:21:11.465 --> 00:21:15.045
of retail payments, the amount of cash in circulation

432
00:21:15.675 --> 00:21:18.885
went down by 60% over the last 20 years.

433
00:21:19.625 --> 00:21:22.965
So if we have this trend, you know, then you have a a a,

434
00:21:23.685 --> 00:21:27.245
a shift in balance sheets, you have inflows to the banks,

435
00:21:27.705 --> 00:21:30.285
you have a shrinking of the central bank balance sheet,

436
00:21:30.665 --> 00:21:32.525
you would have some macroeconomic effects.

437
00:21:33.025 --> 00:21:36.525
But as issuing CBDC as central banks, see,

438
00:21:36.525 --> 00:21:41.005
it is a conservative move to conserve the current balance

439
00:21:41.035 --> 00:21:42.965
between central bank and private money.

440
00:21:43.705 --> 00:21:45.045
It is a move that, you know,

441
00:21:45.875 --> 00:21:48.605
reduces the macroeconomic effects relative

442
00:21:48.665 --> 00:21:52.325
to the counterfactual of no non such issuance.

443
00:21:52.325 --> 00:21:56.165
Yeah. So unfortunately the literature

444
00:21:56.185 --> 00:21:57.365
is, misleading.

445
00:21:57.735 --> 00:22:00.405
There will be no material effect in the

446
00:22:00.405 --> 00:22:01.805
way CBDC is designed.

447
00:22:02.185 --> 00:22:04.405
Of course, we cannot, you know, know exactly

448
00:22:04.665 --> 00:22:08.605
how in 20 years, so we cannot know how successful CBDC is.

449
00:22:09.265 --> 00:22:13.205
If it's, unsuccessful, which we don't hope then,

450
00:22:13.345 --> 00:22:17.125
the shrinkage of, central bank money, we, you know,

451
00:22:17.685 --> 00:22:19.405
continue on the other side.

452
00:22:19.745 --> 00:22:24.565
If, as, as v has alluded to, if future generations

453
00:22:24.585 --> 00:22:27.365
of central bankers take a more aggressive stance

454
00:22:28.025 --> 00:22:32.405
on the supply of CBDC, you know, removing constraints

455
00:22:32.425 --> 00:22:35.325
and so on, yeah, then it may go in the other direction.

456
00:22:35.345 --> 00:22:37.085
So the, the future's uncertain,

457
00:22:37.545 --> 00:22:39.245
but what is not uncertain is

458
00:22:39.245 --> 00:22:41.685
that the microeconomic literature's conclusion

459
00:22:42.185 --> 00:22:44.045
as they are justified in those papers

460
00:22:44.225 --> 00:22:45.325
are not very convincing.

461
00:22:45.485 --> 00:22:47.805
I think there's a great opportunity now in, in, in,

462
00:22:47.905 --> 00:22:49.485
in studying cbdc, right?

463
00:22:49.485 --> 00:22:51.605
Because we have researchers have started

464
00:22:51.605 --> 00:22:54.645
with these micro models and, these potential

465
00:22:55.955 --> 00:23:00.405
designs have been studied now is really a nice, a nice time

466
00:23:00.425 --> 00:23:04.565
to study more closely, the effects of the type

467
00:23:04.565 --> 00:23:07.925
of designs that have been, discussed by central banks.

468
00:23:07.925 --> 00:23:09.845
And there's much to be done and much to be learned

469
00:23:09.845 --> 00:23:13.805
because it's unique in the history that, bank notes

470
00:23:13.905 --> 00:23:17.485
and central bank money can be made digitally available

471
00:23:17.705 --> 00:23:21.485
and moved, moved to the new, digital age, so to speak.

Modernizing Central Bank Money: The Rise of CBDCs

00:00:00 - Central banks. Banks have communicated, I would say, overall in a similar way, that, CBDC is about, you know, basically modernizing bank notes, making them fit for digital, age. And, you know, we have seen a lot of financial instruments and payment instruments, which were on paper in the past, having moved to digital. And one could say Central Bank. cash bank notes are almost the last, you know,

00:00:34 - and more digital everywhere in the world. We have this trend that, digital payments have become so convenient with smartphones and, I mean, biometric recognition that, the trend is clearly there. So if, if having Central Bank money co-exist with private money in, in retail payments was a good idea in the past, it's likely to be a good idea in the future, and

00:01:05 - So I think central banks view it this way. And, in terms of deployment, who has deployed it? I think the, the biggest, the outstanding, cases, the People's Bank of China, which, you know, where for a long time they had, two, private, e-money companies, if you want, dominating the retail payment market. And the central bank also saw a need to stay, stay in business. And they have, I started hard work, let's say in 2014,

Advancements in CBDC Research and Deployment

00:01:40 - So, they're way ahead and they, they have, already I hear hundreds of millions of, of wallets being deployed and active to some extent. So they're the most advanced Parallel to the work of, of central bank experts. Academics have also picked up the topic of CBDC, roughly around 2016. So to give you some, interesting numbers from Google Scholar, between 2016 and 2020, more than 1000 papers have been written

00:02:10 - central banks and and models. And last year alone, more than 2000 such papers were added so earlier, and I did not review all of them. We didn't even read all of them. but we picked 14 papers that predict macroeconomic consequences of, CBDC. And we choose these 14 papers with the idea of covering a wide range of approaches. and they're written by, renowned economists.

00:02:45 - quite well the, the overall literature. So one paper, for example, is called Should Central Banks Issue Digital, currencies. Another one is called What is, the Optimal Quantity of CBDC in a Bank based Economy. And yet another one, for example, is called CBDC when Price and Bank Stability collide. So these topics are big topics. They are important, questions that are addressed.

Macroeconomic Impacts and Optimal Levels of CBDC

00:03:16 - maybe like some policy makers only the conclusions and, and the abstracts, then they have very, very outspoken, findings. So some papers find very large, many papers find very large macroeconomic effects. There's a 2023 paper by about it all, and they say if there's a moderate CBDC adoption, this leads to a transition from the floor to a corridor system of the Central bank. So they talk about the operational framework of,

00:03:48 - and many other papers talk about more macroeconomic variables like output in a 2023 paper by US and Maha and co-authors, for example, they find that CBDC can help smooth responses to macroeconomic shocks. and similarly, a 2021 paper by Bari and Koff finds that CBDC can increase overall output and can stabilize the business cycle. So these are very, kind of positive, findings.

00:04:19 - some papers also asked the question, what is the optimal amount? There's a 2022 paper by co-authors, and they say in the Euro area, for example, the optimal amount of CBDC is something between 15 and 45% of of GDP. So, so that's, that's quite large, right? And in a paper by geo at all, also from 2019, they find that introducing CBDC affects banks in very significant ways so

Evaluating Macroeconomic Effects of Central Bank Digital Currency

00:04:53 - interest rate on deposits, and they also provide more loans to the real economy, enhancing, growth. And one paper's may be worth mentioning because it's a macroeconomic paper, but does not find any macroeconomic effects, surprisingly, compared to many other papers. It's a 2019 paper by Meyer, and, and here you have large scale CBC, but no macroeconomic effects or even,

00:05:23 - that the central bank refinance all the outflows from, bank deposit. So that in the end, nothing, nothing significant is, is, is happening. So, so summing up, if you take this first, view of, of, of the literature, they really try to answer key policy questions, and many of them find very significant macroeconomic effects In a certain way, though the academic writers,

00:05:55 - or they almost, you know, started the debate. So they come in even before center. I mean, at least at the very early stage, they started to write papers in which they took assumption on how CBDC specified, which never really matched, what central banks were saying, how they may want to do CBDC. So the, the biggest, you know, of those, deviating assumptions is on remuneration that, the majority of papers we review assumes remuneration

Challenges of CBDC Remuneration and Monetary Policy

00:06:29 - to see CBDC as a new, policy instrument. Now you have something that the household, you know, everybody holds directly and you can, change interest rate and your transmission of monetary policy is even more direct and effective. And also, you know, there's a very long debate, about, this anomaly, if you want that bank notes, financial asset that is always remunerated at zero

00:07:00 - short term interest rates are 10%, or if they are even, you know, minus 1%, as we have seen in recent years, they are always at zero. So, you know, in a certain way, economists have been waiting for a change of technology where this would be overcome, and then you can play with the interest rate. but it's not reality because, central banks have all, you know, really all of them who work on CCB D said, we will not remunerate that stuff.

00:07:31 - so little appetite for Remunerating? I think it's because remuneration would be very unpopular. and, and I mean two, two types of actors, you know, hate the idea of remuneration first. people, citizens are made to believe that remuneration could be misused for negative interest rates, financial repression, and the banks hate the idea that central CBDC could be remunerated positively

Central Banks and the Challenges of CBDC Remuneration

00:08:04 - So all those people want tag, and central banks are pragmatic, and they say the main purpose is we want to provide a means of payment. I mean, replacing, I mean, coming in because people use bank notes less, we don't think we need another policy instrument. So that's how we specify no remuneration and even limits. So in a certain way, 75 of the pa percent of the papers already, you know, miss, the point

00:08:35 - on, on remuneration. and then those papers who don't look at remuneration or they admit their zero remuneration, they don't find, I think there's not a single one which finds a meaningful differentiation between cash and, and CBDC, because, you know, if, if you look at any macroeconomic model, cash and remunerated CBDC, I mean, it's the same, you know,

00:09:08 - what are those people telling us? How in their model is, is cash different from CBDC? And never you find a meaningful, explanation. So what the models are really about then is an in an assumed increase in total central bank money in circulation. So, you know, they just assume, now we have a 1.5 trillion bank notes in the Euro area, then come CBDC, it will be enormous, it will be another trillion.

Evaluating the Impact of CBDC on Central Bank Money Circulation

00:09:39 - of central bank money circulation? So first, they're not modest of CBDC, but increase of central bank money. And second, this increases even, you know, wrong because, CBDC is a reaction to the decline of bank loans, the declining use, and it's only filling a gap that is created by that. So we, I I, I don't expect central bank money in circulation to be higher relative to GDP in let's say 20 years,

00:10:13 - because, yeah, I think the, the fact that the way CBDC has been designed will lead to low volumes of CBDC, Bede will go down. So the opposite of what those models who don't assume remuneration, be it the macroeconomic effects on If you want to take the, understand the results and the, the plausibility of the results of these models. On the one hand side, it's really about the kind of design choices as, as mentioned.

00:10:44 - and they should study a variety, variety of, of designs. And then when central banks already specify current designs, it might make sense to refer to these designs or take them maybe into account as, as some, some benchmarks. But I think our critique also, to some extent goes, goes further to the, to the models per se, how they are, how they are set up, the model,

Evaluating Economic Models in CBDC Literature

00:11:15 - Most of the models that we review, they're either of new monitors or new Cajun, type. We also have two, three outliers. We have a diamond and dip big type of model, and then we also have a stock flow consistent model. all of these papers, except the stock flow consistent models are their model is they, they are rooted in kind of the seventies, eighties, in the, in the big neoclassical revolution.

00:11:44 - two important paradigms in which they're rooted. First it's the, the micro foundations. So these papers, originally, these models typically assume that there's no money. You focus on the real economy. you focus on full competition, on, equilibrium, you focus on representative agents. So you don't really look at the aggregate, but you look at an individual household or government and then take this as a representative for the whole,

00:12:15 - Now, regarding these micro foundations, most models have moved beyond these old school neoclassical models. They have, typically a separate financial sector, which is key. Many of these models also differentiate the central bank from the commercial bank, which is also very important if you want to talk about, CBDC, because much of the discussion is really about the impact on, on deposits and, and bank notes. But still, there are a couple of papers where you don't distinguish

Implications of Central Bank Money Accessibility

00:12:47 - And then of course you can't make any, any statements by definition about, for example, bank runs the effects of different types of, of money. And then you probably should, state this clearly, but still then, even if you take the financial sector more, more seriously, it's important when you take this rather micro perspective view on the, on the economy to be aware of fallacies of composition. So one that, we saw on a couple of papers is

00:13:18 - central bank money is great, right? It's the, the safest, credit money that exists and our monetary economists economies. And individually it might make a lot of sense to have large scale access. Every person individually would probably find it great to have an unlimited account at the central bank. but then if you look at the system as a whole, if the central bank would open up the balance sheet for, to all citizens in an unlimited way,

00:13:52 - Because then suddenly the central bank balance sheet becomes very large and this high credit quality, is, is diluted because many other assets have to be moved to the, to the central bank balance sheet. And another important paradigm where these models are rooted in is the money neutrality paradigm, paradigm. It's in the eighties, you don't have money, you have, basically a barter exchange economy.

Dynamic Models for CBDC and Monetary Systems

00:14:22 - they typically deviate from this by including either frictions. These are then the, so-called new engine models, or they have some kind of decentralized markets and information asymmetries, but you need money in order to be active, on these markets. These are called the new monitors, models. So you have room for money, but, but you kind of start with a world, without money. And then finally, it's maybe worth mentioning that related

00:14:52 - The root of these models is to typically look at equilibria. It, it's typically a static analysis. Of course, modern, modern models then move, move beyond this. But traditionally, they, they are rather, they take a static perspective. That's kind of the home, the home of these model. It's, you wanna find an equilibrium that is, that is stable, right? But then when we look into, CBDC as Ulrich mentioned in the beginning, we have, structural changes just going on in the payment sphere.

00:15:25 - and payments evolve over time, a very dynamic, process. And therefore it might make sense to use models that can really capture this, this dynamic. So a against this backdrop of, of the kind of the models that that are used, we think there's an opportunity for different types of CBDC models that do not start with the conet economy, but directly model the monetary capitalist economy

Exploring CBDC Design: Financial Stability and Central Bank Objectives

00:15:54 - and then really focus on on CBDC, on bank notes and deposits and the, the payments market. But nevertheless, of course, the, the modern location and monitors, new monitors models, they're very flexible. many of these models, you can easily adjust the design and you can also easily extend them. You can, for example, then add a banking sector if you don't have one. so far. So there's also room for making them some regards more

00:16:26 - so far not been, not been discussed. If we look at the design that is currently discussed as, as summarized by, by oli with, non remuneration and, access limits, then there's no concern regarding financial stability because the volumes are really, relatively small. Now, if we step back and in principle, what central banks want to achieve is to preserve the role of central bank money, and you could say, yeah, let's make it unlimited

00:16:57 - to, to everyone. But then central banks are rather careful regarding this approach because they want to avoid unintended side effects. And the key potential unintended side effect is really to have A-C-B-D-C that is then used as a store value in, in large quantities. And this would have, two, two effects. First you have a, a new destination for deposits.

Implications of CBDC on Central Bank Balance Sheets

00:17:27 - many people would likely move them into cbdc and, reduce deposits in the banking system. And second, you thereby would increase the central bank balance sheet. And the central bank could, would in some way have to then refinance these deposit outflows. And by doing this, if they do this in a collateral collateralized way, they would've to accept certain assets from banks. And today, the, the lending facilities of,

00:17:58 - to high quality, collateral. But if you do this on a large scale, then suddenly the central bank, the central institution would've to conduct some kind of risk monitoring for almost the whole economy. So the footprint of the central bank on the economy would, would increase. And, central bank money, the way we know it, and the way it has been historically would be, would no longer, exist. So for the current design, therefore there are no financial stability implications.

00:18:30 - If you then look at parts of the literature, they have large scale access to the central bank balance sheet, but do not share any, financial stability concerns. And why is this? So in some papers, they simply assume that the central bank refinances everything from an accounting view. You can just say, okay, every out, every deposit outflow is mirrored by an, by an inflow from the, from the central bank. And if you then don't have a,

Assessing Central Bank Digital Currency (CBDC) Models and Financial Stability

00:19:00 - or the value added of banks, if there's no value added of banks of this decentralized monitoring of the real economy, and the central bank could do it as well. And then you do not find any concerns of opening up the central bank or even, in, in this paper by Meyer and neighbor from 2019, they say, this could even enhance financial stability because suddenly you have the central bank as the largest at commercial banks, and they say the central bank will not run.

00:19:32 - for commercial banks, this is one aspect in, in the literature where you have models where they run into the central bank, doesn't matter. And then there are other models, as I've mentioned earlier, where this run is just simply not possible by design. So in, in some models, CBDC can only be acquired in exchange for government bonds, for example, which is, which goes, which then is not A-C-B-D-C anymore, right? If you talk about CBC, then this is something like,

00:20:05 - or with your deposits. so making it available only through government bonds, it's a, it's a different financial instrument or as mentioned in other models, you simply don't have a banking system and therefore by definition, you cannot, you cannot have a run. So you can't find any adverse side effects of opening up the, the public central bank balance sheet. We can't learn so much from the macroeconomic literature, unfortunately.

Evaluating the Macroeconomic Impact of CBDC

00:20:36 - the question is, I mean, two things. What will really be the effect the macroeconomic effects of CBC as announced by, by central banks, and I would say, they will be negligible or not identifiable or in a certain way, you know, not introducing CBDC would have larger effects than introducing it, because if we don't introduce it,

00:21:07 - an economy which is very advanced in terms of digitalization of retail payments, the amount of cash in circulation went down by 60% over the last 20 years. So if we have this trend, you know, then you have a a a, a shift in balance sheets, you have inflows to the banks, you have a shrinking of the central bank balance sheet, you would have some macroeconomic effects. But as issuing CBDC as central banks, see,

00:21:41 - between central bank and private money. It is a move that, you know, reduces the macroeconomic effects relative to the counterfactual of no non such issuance. Yeah. So unfortunately the literature is, misleading. There will be no material effect in the way CBDC is designed. Of course, we cannot, you know, know exactly how in 20 years, so we cannot know how successful CBDC is.

Exploring the Future of CBDC and Its Economic Implications

00:22:13 - the shrinkage of, central bank money, we, you know, continue on the other side. If, as, as v has alluded to, if future generations of central bankers take a more aggressive stance on the supply of CBDC, you know, removing constraints and so on, yeah, then it may go in the other direction. So the, the future's uncertain, but what is not uncertain is that the microeconomic literature's conclusion

00:22:44 - are not very convincing. I think there's a great opportunity now in, in, in, in studying cbdc, right? Because we have researchers have started with these micro models and, these potential designs have been studied now is really a nice, a nice time to study more closely, the effects of the type of designs that have been, discussed by central banks. And there's much to be done and much to be learned because it's unique in the history that, bank notes

00:23:17 - and moved, moved to the new, digital age, so to speak.

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