Title page

Contents

Abstract 2

Non-technical summary 3

1. Introduction 5

2. The model 9

2.1. Households 12

2.2. Entrepreneurs and production 15

2.3. Banks 17

2.4. CBDC issuance 18

2.5. Solution method 20

3. Simulations 21

3.1. Steady-state effects 22

3.2. Transition without mitigating policies 23

3.3. Transition with holding limits 28

3.4. Transition with tiered remuneration 29

3.5. Transition with central bank balance sheet expansion 30

3.6. Transition with restricted access of foreigners to CBDC 32

3.7. Optimal level of holding limits 34

4. Conclusion 36

References 37

Appendix 40

A. Derivations 40

B. Tables 56

C. Figures 57

Acknowledgements 68

Figure 1. Model overview 10

Figure 2. Percentage changes between the stochastic steady-states without and with CDBC 22

Figure 3. Transition to the new steady-state with CBDC without mitigating policies 24

Figure 4. Transition to the new steady-state with CBDC without mitigating policies when CBDC demand is 5% of GDP in the new steady-state 26

Figure 5. Transition to the new steady-state with CBDC without mitigating policies when Money has a 10% holding cost 27

Figure 6. Transition to new steady-state with CBDC and soft holding limit calibrated to the steady-state level of CBDC demand 29

Figure 7. Transition to new equilibrium with CBDC and holding limit calibrated to 50% of steady-state demand for CBDC 30

Figure 8. Transition to new equilibrium with CBDC and tiered remuneration 31

Figure 9. Transition to new equilibrium with CBDC currencies with central bank balance sheet expansion 32

Figure 10. Transition to the new equilibrium with CBDC with no access of foreigners 33

Figure 11. Transition to the new equilibrium with CBDC with partial access by foreigners (higher cross-border transaction costs) 34

Figure 12. Welfare gains (or losses) for alternative levels of CBDC holding limit 35

Table B.1. Calibration 56

Figure C.1. Transition to the new equilibrium with CBDC without mitigating policies (other variables) 57

Figure C.2. Transition to the new equilibrium with CBDC with central bank balance sheet expansion (other variables) 58

Figure C.3. Transition to the new equilibrium with CBDC under aggressive central bank balance sheet expansion 59

Figure C.4. Transition to the new equilibrium with CBDC under aggressive central bank balance sheet expansion (other variables) 60

Figure C.5. Transition to the new equilibrium with CBDC when CBDC issuance is announced 12 periods (3 years) in advance 61

Figure C.6. Transition to new equilibrium with CBDC and soft holding limit calibrated to the steady-state level of CBDC demand - foreign economy 62

Figure C.7. Transition to new equilibrium with CBDC and holding limit calibrated to 50% of steady-state demand for CBDC - foreign economy 63

Figure C.8. Transition to new equilibrium with CBDC and tiered remuneration - foreign economy 64

Figure C.9. Transition to new equilibrium with CBDC currencies with central bank balance sheete xpansion - foreign economy 65

Figure C.10. Transition to the new equilibrium with CBDC with no access by foreigners - foreign economy 66

Figure C.11. Transition to the new equilibrium with CBDC with partial access by foreigners (higher cross-border transaction costs) - foreign economy 67