Special Topics: Digital Currencies
Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)
- Chair: Andreea Minca, Cornell University
The Demand for Programmable Payments
AbstractThis paper studies the desirability of programmable payments where transfers are automatically executed conditional upon preset objective criteria. We do so by studying optimal payment arrangements in a framework that captures a wide range of economic relationships between two parties. The results show that the optimal payment arrangements for long-term economic relationships consist predominantly of simple direct payments. Direct payments increase the surplus by avoiding the liquidity cost of locking-up funds from the moment where the payer commits the funds in a programmable payment until the moment where the conditions are satisfied to release those funds to the payee. Programmable payments will be desirable, and may in fact be the only viable payment arrangement, in situations where economic relationships are of a short duration. Our results identify a limit to the growth in the demand for payments as their cost decreases: While the number of feasible trading relationships will increase, existing trading relationships will optimally rely on fewer payments.
CBDC and Banks: Threat or Opportunity?
AbstractWe study how banks react to the introduction of a Central Bank Digital Currency (CBDC) when households have heterogeneous preferences. We find that banks increase their deposit interest rates in response to a CBDC, even when the CBDC pays no interest rate. However, when the central bank provides funding to offset the loss in deposits, banks optimally push households towards the CBDC by reducing deposit interest rates. This allows them to liquidate reserves, reduce their cost of funding, and increase their profits. We calibrate the model to provide quantitative estimates of these mechanisms.
- G0 - General