Thanks to recent technological advances, central banks can issue a new type of money that travels through a network of computers around the globe and is exchanged with the click of a mouse or by using a mobile device. This central bank digital currency (CBDC) could change how people make payments and how financial firms operate. A CBDC is an efficient payment instrument for both domestic and international transactions, but it might prompt households and firms to shift funds away from bank deposits, increasing banks’ funding cost and decreasing investment in the economy. This article examines a CBDC’s potential benefits and trade-offs for society.

This article appeared in the Second Quarter 2020 edition of Economic Insights. Download and read the full issue.