The crowding-out effect of central bank digital currencies: A simple and generalizable payment portfolio model

We construct a simple and generalizable payment portfolio model to examine the potential crowding-out effect of Central Bank Digital Currencies (CBDC) on bank deposits. Specifically, economic agents choose among cash, deposits, and CBDC to maximize the utility while satisfying their basic payment needs. Our model shows that, under the certain condition, agents have demand for CBDC and reduce the holdings of cash and deposits at the same time. The issuance of CBDC is a double-edged sword: the benefit of replacing physical cash for a more efficient payment system comes at the cost of disrupting the deposit base for commercial banks.