The digitalisation of large parts of everyday life and of the economy also extends to payment transactions. In the euro area, for example, the share of cash payments at the point-of-sale (i.e. in physical shops) declined from 79 percent to 59 percent between 2016 and 2022, mainly for the benefit of card payments.

If this trend continues or even accelerates, the role of cash and thus central bank money would decrease significantly for the benefit of private payment service providers. 

This also raises concerns about insufficient competition, inclusiveness, privacy protection as well as strategic autonomy of sovereign states.

Against this backdrop, a heated debate about retail digital money issued by central banks – central bank digital currency – began in 2016. 

Due to the growing number of papers that present macroeconomic models examining CBDC and, on the other hand, quite detailed plans by central banks to issue CBDC, the question is to what extent the assumptions and scenarios contained in these macroeconomic models of CBDC correspond to the objectives and emerging design choices communicated by central banks.

What central banks have announced on CBDC

All central banks working on CBDC have announced that CBDC would not be remunerated, that holdings would be limited, and that CBDC issuance would aim to preserve the roles of central bank money in retail payments in a digitalised world. 

Another set of key features announced for CBDCs are those that allow to somewhat decouple the store of value from the means of payments function of CBDC and that facilitate the preservation of a single pool of money for citizens. 

For example, the European Central Bank announced a so-called ‘reverse waterfall’ so that users would not have to prefund a digital euro account before making payments because the digital euro account can be linked to a commercial bank account. 

Last but not least, central banks have announced access restrictions for CBDC. For example, the ECB plans to only allow natural persons who are permanent residents of the euro area (or possibly of the European Union), and temporary residents (e.g. travelers) to be able to hold digital euro within the limits.

Gaps and fallacies in the macroeconomic literature on CBDC

Our paper identifies in particular the following issues which future research on the macroeconomics of CBDC should address.

 First, the modelling in all the papers assumes that the decision to issue CBDC hits a static monetary and financial system. But the decision to issue CBDC is a ‘conservative’ response to profound changes of the monetary system relating to digitalisation. In other words, the macroeconomic effects of not issuing CBDC are likely to be more relevant than the ones of issuing it. Overlooking this means very likely ending with wrong conclusions.

Second, many papers do not consider the design features of possible CBDCs as outlined more recently by central banks. Most papers assume remunerated CBDC, or that CBDC is of considerable volume.

Third, as real-world CBDCs are expected to be unremunerated, it is difficult to specify a clear difference between CBDC and cash in macroeconomic models. None of the papers develops this difference in a way that could imply macroeconomic consequences.

Fourth, and relating to previous points, the papers generally tend to assume, in line with earlier narratives, that the issuance of CBDC will considerably increase the amount of central bank money in circulation. 

But it is more likely that the combined decline of banknotes in circulation (relating to their lesser use) and the announced CBDC design features will lead to a declining volume of central bank money in circulation, even if CBDC is issued.

The way forward on understanding the impact of CBDC

Under the assumption of ever-progressing digitalisation of society, the macroeconomic effects of issuing CBDC should be identified starting from the counterfactual. 

If retail payments are exclusively left to the private sector and central bank money would be marginalised, then the amount of central bank money in circulation will significantly shrink, the length of central bank balance sheets would decline and the banks would benefit from deposit inflows, payment costs will increase (due to increasing market power of the successful firms), monetary and financial stability will be weakened (as the unifying convertibility test of all private moneys, i.e. to be exchangeable at sight against central bank money, will have become remote or inexistent), and strategic autonomy. 

In this sense, the issuance of CBDC aims at preserving economic efficiency and stability by preserving the current role of central bank money – a genuine public good.

Of course, it cannot be excluded that some central banks and legislators will, in the future, design CBDCs which better match the assumptions taken in the macro models reviewed. 

For this reason, the models remain useful for future scenarios. Moreover, macroeconomic researchers could review the macroeconomic predictions of the models for CBDCs designed as in recent central bank communications.

By Ulrich Bindseil & Richard Senner

Ulrich Bindseil is Director General of Market Infrastructure and Payments at the European Central Bank and Richard Senner was working at the Directorate General, Macroprudential Policy and Financial Stability at the European Central Bank.