CBDCs, Financial Inclusion, and Monetary Policy

In this paper we study the macroeconomic effects of introducing a retail central bank digital currency (CBDC). Using a two agent framework and endowment economy with banked and unbanked households, we show digital currencies address financial inclusion of the unbanked, by providing a savings vehicle they allow households to smooth consumption. Finally, we study the monetary policy implications in a New Keynesian setting. Welfare gains under strict inflation targeting is higher for a retail CBDC with a primarily unbanked population. An CBDC distributed to households by commercial banks is preferred to a CBDC distributed by the central bank. Taken together, our findings suggest a stronger use case in developing economies with a lower degree of financial inclusion