The level of global interest in central bank digital currencies (CBDCs) is unprecedented. According to a 2022 survey from the Bank of International Settlements (BIS), 93 percent of central banks are exploring CBDCs, and 58 percent report that they are likely to or might possibly issue a retail CBDC in the short or medium term (Kosse and Mattei 2023).

Indeed, more than 100 countries are exploring retail CBDC issuance. Several central banks have already launched pilots or even issued a CBDC. The implications of CBDCs for monetary policy transmission is a topic of significant interest for IMF member countries. Monetary policy transmission plays a critical role in the overall functioning of an economy because it determines how changes in policy measures and interest rates implemented by central banks affect key economic variables such as investment, consumption, inflation, and employment.

The proposed foundational principles for CBDCs stipulate that CBDC designs should align with central bank mandates to achieve price stability (low and stable inflation) and to help manage economic fluctuations (BIS, 2020). CBDCs could bring both opportunities and challenges to monetary policy transmission. For some countries, enhancing monetary policy effectiveness is an important motivation for CBDC exploration; for others, motivations include modernizing the financial system, reducing future risks associated with rapid digitalization, and lowering the costs of person-to-person monetary transfers.

At the same time, some countries view the potential for CBDCs to weaken monetary policy transmission as a risk. This note provides a conceptual analysis of the implications of CBDCs for monetary policy. In particular, it focuses on the implications of a retail CBDC, which would be available to the general public and is the scale of access that most central banks are considering.

The baseline design considered in this paper is a non-remunerated CBDC with possible caps on individual holdings and accessible only in the issuing jurisdiction (the most common design among central banks adopting or piloting CBDCs thus far). The issuance of retail CBDCs can impact key parts of countries’ macroeconomic environment. In turn, these changes in the macroeconomic environment may affect both the tightness of financial conditions (upon issuance) and the transmission of monetary policy through the main channels: the interest rate channel, bank lending channel, asset price channel, and exchange rate channel. CBDCs may have an impact on countries’ macroeconomic environment in several ways. CBDCs offer a safe store of value and efficient means of payment, which can increase competition for deposit funding, increase banks’ share of wholesale funding, and lower bank profits.

CBDCs also have the potential to bolster financial inclusion to the extent that they can address the barriers to inclusion for the unbanked. In dollarized or euroized economies, or in economies where the adoption of crypto assets is widespread, the introduction of CBDCs could also encourage a greater use of the local currency, 1BIS survey data show that central banks are particularly interested in retail CBDCs: all central banks conducting work on CBDCs either look at both wholesale and retail CBDCs or focus solely on a retail CBDC.

Implications of CBDCs for Monetary Policy Transmission particularly in lieu of other forms of digital money denominated in foreign currency or crypto assets (that is, “de-dollarization/de-cryptoization”). Changes in the macroeconomic environment could lead to either a tightening or a loosening of financial conditions. Increased competition for bank deposit funding, increased wholesale funding, and lower bank profits would tighten financial conditions.

On the other hand, increased financial inclusion could loosen financial conditions. Decreasing dollarization/cryptoization has an ambiguous impact on financial conditions. The central bank should closely monitor the effects of CBDC issuance on the macroeconomic environment so that it can react to maintain a given level of financial conditions, if needed. As it can with any other economic shock, the central bank can choose to adjust its policy instruments to achieve its objectives as the macroeconomic environment evolves.

Given that the introduction of CBDCs could either tighten or loosen financial conditions, keeping a close watch over the macroeconomic environment related to monetary policy would be warranted. The central bank can offset the impact if necessary. CBDCs have the potential to strengthen the channels of monetary policy transmission. De dollarization/de-cryptoization is likely to amplify all transmission channels.

Increased competition for bank deposit funding could strengthen the interest rate and bank lending channels. Increased wholesale funding would strengthen the bank lending channel. Higher levels of financial inclusion can strengthen the interest rate and asset price channels. There are unlikely to be additional effects on the exchange rate channel. In general, the effects of CBDCs on monetary policy transmission are expected to be relatively small in normal times; however, these effects can be more significant in an environment with low interest rates or financial market stress.

The strengthening of transmission channels via increased competition and wholesale funding relies on a significant substitution of bank deposits for CBDCs, which may not materialize. The impact of financial inclusion is also uncertain and constrained by the relatively small share in overall savings and lending of the financially excluded population, particularly in more advanced economies. The impact of de-dollarization/de-cryptoization may also be small if CBDCs do not effectively increase the attractiveness of local currency.

Furthermore, most central banks exploring CBDCs are considering precautionary design features such as holding and transaction limits and tiering of interest rates. Such features will limit the potential flight from retail deposits or cash into CBDCs and are thus likely to ensure that the CBDC does not have a significant impact on monetary policy transmission. However, when policy rates are low and in times of financial market stress, the impact of CBDC on monetary transmission could be more significant.

A non-remunerated CBDC could entrench the zero lower bound for interest rates. And when there is financial market stress, there is greater risk of a flight to safety from retail bank deposits into CBDCs. The impact of CBDCs on monetary policy transmission will depend on both the design features of the CBDC and characteristics of the economy. This note is intended to give central banks a general framework to understand the likely impacts of CBDCs on monetary transmission.

Practitioners can apply the principles of this framework to the specific characteristics of their economies when considering the potential impact of CBDCs on monetary policy transmission. Doing so will also allow them to incorporate such considerations into the design of the CBDC.

In the long run, CBDCs could help maintain the convertibility between private money and central bank money in jurisdictions where cash is becoming increasingly marginalized. The loss of such convertibility has uncertain implications for the basic trust in the monetary system. CBDCs could therefore potentially serve as a “monetary anchor” for the monetary system—and, by extension, also maintain the ability of the central bank to conduct monetary policy (Panetta, 2021).

The strengthening of transmission channels via increased competition and wholesale funding relies on a significant substitution of bank deposits for CBDCs, which may not materialize. The impact of financial inclusion is also uncertain and constrained by the relatively small share in overall savings and lending of the financially excluded population, particularly in more advanced economies. The impact of de-dollarization/de-cryptoization may also be small if CBDCs do not effectively increase the attractiveness of local currency.

Furthermore, most central banks exploring CBDCs are considering precautionary design features such as holding and transaction limits and tiering of interest rates. Such features will limit the potential flight from retail deposits or cash into CBDCs and are thus likely to ensure that the CBDC does not have a significant impact on monetary policy transmission. However, when policy rates are low and in times of financial market stress, the impact of CBDC on monetary transmission could be more significant.

A non-remunerated CBDC could entrench the zero lower bound for interest rates. And when there is financial market stress, there is greater risk of a flight to safety from retail bank deposits into CBDCs. The impact of CBDCs on monetary policy transmission will depend on both the design features of the CBDC and characteristics of the economy. This note is intended to give central banks a general framework to understand the likely impacts of CBDCs on monetary transmission.

Practitioners can apply the principles of this framework to the specific characteristics of their economies when considering the potential impact of CBDCs on monetary policy transmission. Doing so will also allow them to incorporate such considerations into the design of the CBDC.

In the long run, CBDCs could help maintain the convertibility between private money and central bank money in jurisdictions where cash is becoming increasingly marginalized. The loss of such convertibility has uncertain implications for the basic trust in the monetary system. CBDCs could therefore potentially serve as a “monetary anchor” for the monetary system—and, by extension, also maintain the ability of the central bank to conduct monetary policy (Panetta, 2021).