In a new research paper, the Bank of England has stated that central bank issued digital currencies could raise gross domestic product (GDP).
Penned by John Barrdear and Michael Kumhof, the working paper titled “The macroeconomics of central bank issued digital currencies”, studies the macroeconomic consequences of a central bank granting universal, electronic, 24x7, national-currency-denominated and interest-bearing access to its balance sheet via the issuance, according to well-specified policy rules, of a central bank digital currency (CBDC).
“First, it leads to an increase in the steady-state level of GDP of almost 3%, due to reductions in real interest rates, in distortionary tax rates and in monetary transaction costs that are analogous to distortionary tax rates. Second, a CBDC regime can contribute to the stabilization of the business cycle, by giving policymakers access to a second policy instrument that controls either the quantity or the price of CBDC in a countercyclical fashion”, it said.
The authors further said that although from a macroeconomic perspective, the use of distributed ledgers is not strictly required for the operation of a CBDC system, it would be necessary as a practical matter, in order to ensure the resiliency of a system.
However, the paper also notes the “negative side”, saying that there remains a clear concern with the proper management of the risks involved in transitioning to a different monetary and financial regime. It also emphasized on serious problems with existing private versions of digital currencies, associated with their prohibitively high costs of transaction verification.
“Alternative implementations, such as “permissioned” systems, may potentially avoid these costs by stepping away from purely decentralised designs while still retaining many of the benefits”, it said. “One possible application of such a permissioned system would be the issuance of a central bank digital currency (CBDC) — universal, electronic, 24x7, national-currency-denominated and interest-bearing access to a central bank’s balance sheet.”
The Economic Affairs Committee of the House of Lords will meet today to discuss blockchain and distributed ledger technology. Ben Broadbent, Deputy Governor, Monetary Policy, Bank of England, is expected to speak at the meeting.
