How do central bank digital currencies (CBDCs) change monetary policy transmission?

Monetary policy transmission is reshaped by central bank digital currencies (CBDCs) through both traditional channels—interest rate, credit, exchange rate, asset price, and expectations—and novel programmable tools. Empirical and theoretical studies underscore that the magnitude and direction of these effects hinge critically on CBDC design features (remuneration, access, holding limits, and interoperability).

1. Interest-Rate Channel • Direct rate pass-through: An interest-bearing retail CBDC enables central banks to transmit policy rates straight to households and firms, bypassing bank deposit rates and shortening transmission lags [1][2]. • Effective lower bound (ELB): By reducing reliance on zero-yielding cash, CBDCs lower the ELB constraint, allowing negative nominal rates to be more potent [1][3]. • Limits of interest bearing: General‐equilibrium models suggest that simply replacing cash with an interest-bearing CBDC does not expand the set of attainable allocations beyond those with existing instruments [4].

2. Credit Channel • Disintermediation risk: A large‐scale shift of deposits into CBDC can erode banks’ funding bases, curtail lending capacity, and weaken the credit multiplier [2][5]. • Mitigants via design: Tiered remuneration and per-capita holding limits (e.g. €3,000) can curb rapid deposit outflows and preserve bank liquidity, sustaining credit flows [6]. • Alternative facilities: Wholesale CBDCs and enhanced central bank liquidity backstops can substitute lost intermediation, cushioning the impact on bank credit supply [2].

3. Exchange-Rate Channel • Cross-border capital flows: Interoperable CBDCs may heighten international capital mobility, magnifying exchange rate volatility and altering the pass-through of domestic policy to external balances [7]. • Currency substitution: Easy foreign CBDC access risks dollarization, undermining monetary autonomy and blunting domestic policy effectiveness [7].

4. Asset-Price Channel • Safe-asset shift: In downturns, investors’ flight into risk-free CBDC alters demand for bank deposits and government bonds, affecting asset prices and risk premia [4][6]. • Liquidity impacts: Enhanced digital payment liquidity may compress liquidity premia in short-term markets, influencing broader asset valuations [3].

5. Expectations Channel • Real-time data and macro-surveillance: CBDCs furnish central banks with high-frequency transaction data, refining economic forecasts and enabling more timely policy adjustments [2][3]. • Credibility and transparency: Clear issuance rules and programmable policy functions can bolster central bank commitment, anchoring inflation and output expectations [8].

6. Novel Programmable Tools • Targeted transfers: “Digital helicopter money” via CBDC allows unconditional, programmable transfers to specific groups, enhancing the precision of fiscal-monetary stimulus [1][2]. • Smart contracts and tiered rates: Embedded policy rules (e.g. time-varying rates or conditional disbursements) introduce algorithmic transmission mechanisms, potentially automating aspects of monetary policy [3]. Conclusion CBDCs can strengthen and accelerate traditional transmission channels while introducing new, highly targeted policy tools. However, the net gains depend on design choices that balance efficiency and financial stability—particularly in preventing bank disintermediation, preserving credit provision, and maintaining central bank independence. Carefully calibrated remuneration, access limits, and interoperability frameworks are essential to harness CBDCs’ full potential for monetary policy transmission.