BoE Bullish on Digital Currencies


A central bank-issued digital currency could have a profound positive effect on economic growth, conclude the authors of a Staff Working Paper published by the Bank of England.

John Barrdear, a research economist at the Bank of England, and Michael Kumhof, a senior research advisor, Research Hub at the Bank of England found that a central bank could see a 3% steady state gain in GDP if it adopted CBDC.

The researchers drew their conclusions using a canonical New Keynesian monetary model, which included a “financing through money creation” component and the minimum structure necessary to accommodate interest -bearing CBDC, according to the authors. They also calibrated the model to the pre-crisis US economy.

John Barrdear, Bank of England

John Barrdear,
Bank of England

“Our analysis suggests the only condition needed to secure these gains are that a sufficiently large stock of CBDC is issued in a steady state and that the issuance mechanism of the CBDC ensures that the central bank only trades CBDC against government debt instruments.”

The model achieved an approximate 3% gain in GDP when the Narrdear and Kumhof hypothesized injecting CBDC worth 30% of the GDP into the system.

“We chose 30% because this is an amount loosely similar to the magnitude of quantitative easing conducted by various central banks over the last decade,” the authors wrote.

Barrdear and Kumhof also noted that CBDC could “contribute to the stabilization of the business cycle, by giving policy markets access to a second policy instrument that controls either the quantity or the price of CBDC in a countercyclical fashion.”

CBDC should not be confused with private digital currency, such as Bitcoin or Ethereum. The pair defines CBDC as “central banks granting universal, electronic, 24×7, national currency denominated and interest-bearing access their balance sheets.”

These conclusions are only the tip of the iceberg when it comes to the study of CBDC’s impact on monetary policy and much more research still needs to be done, according to Barrdear and Kumhof.

“The study has made the theoretical and empirical gaps in our knowledge much clearer,” they wrote. “We are hopeful that filling these gaps will form part of a multi-prong research agenda across central banks, covering economic theory, empirical works, and a research program on the technological aspects of distributed ledgers that are relevant to CBDC.”

Barrdear and Kumhof’s bullish beliefs in the benefits of digital currencies mirror the conclusions of the authors of a staff discussion note published by the International Monetary Fund in January.

Unlike Barrdear and Kumhof, the note’s authors stated that the national and international regulators should address issues of financial integrity, consumer/investor protection, and tax evasions before discussing monetary policy.

“While the risk to the conduct of monetary policy seems less likely to arise, risks to financial stability may eventually emerge as the new technologies come into more widespread use,” wrote the IMF authors.

They also suggested that more could be done at the international level to develop and refine virtual currency policies at a national level.

“International bodies are playing an important role in identifying and discussing the risks posed by virtual currencies and possible regulatory responses, and they should continue to do so,” they wrote. “As experience is gained, international standards and best practices could be considered to provide guidance on the most appropriate regulatory responses in different fields, thereby promoting harmonization across jurisdictions.”

Both sets of authors stated that their respective works represented their own thoughts and opinions and not those of their institutions.


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