In this paper, I construct an equilibrium for markets with frictions, which is competitive in the sense that all agents are price takers and maximize utility subject to a set of market parameters. I show that the equilibrium allocation is socially optimal. I also show how the competitive search equilibrium can be achieved if employers with vacancies can advertise publicly the wages they pay.

Competitive Search Equilibrium

The Theory of Incentives I: The Principal-Agent Model

Central bank digital currencies (CBDCs) are receiving more attention than ever before. Yet the motivations for issuance vary across countries, as do the policy approaches and technical designs. We investigate the economic and institutional drivers of CBDC development and take stock of design efforts. We set out a comprehensive database of technical approaches and policy stances on issuance, relying on central bank speeches and technical reports. Most projects are found in digitised economies with a high capacity for innovation. Work on retail CBDCs is more advanced where the informal economy is larger. We next take stock of the technical design options. More and more central banks are considering retail CBDC architectures in which the CBDC is a direct cash-like claim on the central bank, but where the private sector handles all customer-facing activity. We conclude with an in-depth description of three distinct CBDC approaches by the central banks of China, Sweden and Canada.

https://www.econstor.eu/bitstream/10419/229473/1/cesifo1_wp8655.pdf

Rise of the central bank digital currencies: drivers, approaches and technologies

We study the optimal design of a central bank digital currency (CBDC) in an environment where agents sort into cash, CBDC and bank deposits according to their preferences over anonymity and security; and where network effects make the convenience of payment instruments dependent on the number of their users. CBDC can be designed with attributes similar to cash or deposits, and can be interest-bearing: a CBDC that closely competes with deposits depresses bank credit and output, while a cash-like CBDC may lead to the disappearance of cash. Then, the optimal CBDC design trades off bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC alleviates the central bank's tradeoff.

Designing Central Bank Digital Currencies

We study how the introduction of a central bank-issued digital currency affects interest rates, the level of economic activity, and welfare in an environment where both central bank money and private bank deposits are used in exchange. Banks in our model are financially constrained, and the liquidity premium on bank deposits affects the level of aggregate investment. We study the optimal design of a digital currency in this setting, including whether it should pay interest and how widely it should circulate. We highlight an important policy tradeoff: while a digital currency tends to promote efficiency in exchange, it can also crowd out bank deposits, raise banksfunding costs, and decrease investment. Despite these effects, introducing a central bank digital currency often raises welfare.

/pdf/should-central-banks-issue-digital-currency-30zqs9t1bj.pdf

Should Central Banks Issue Digital Currency

Many central banks are contemplating whether to issue a central bank digital currency (CDBC). CDBC has certain potential benefits, including the possibility that it can bear interest. However, using CBDC is costly for agents, perhaps because they lose their anonymity when using CBDC instead of cash. I study optimal monetary policy when only cash, only CBDC, or both cash and CBDC are available to agents. If the cost of using CBDC is not too high, more efficient allocations can be implemented by using CBDC than with cash, and the first best can be achieved. Having both cash and CBDC available may result in lower welfare than in cases where only cash or only CBDC is available. The welfare gains of introducing CBDC are estimated as up to 0.64% for Canada.

/pdf/central-bank-digital-currency-and-monetary-policy-3ja2ufa38r.pdf

Central Bank Digital Currency and Monetary Policy

This paper develops a micro-founded general equilibrium model of payments to study the impact of a central bank digital currency (CBDC) on intermediation of private banks. If banks have market power in the deposit market, a CBDC can enhance competition, raising the deposit rate, expanding intermediation, and increasing output. A calibration to the United States economy suggests that a CBDC can raise bank lending by 1.96% and output by 0.21%. These ``crowding-in'' effects remain robust, albeit with smaller magnitudes, after taking into account endogenous bank entry. We also assess the role of a non-interest-bearing CBDC as the use of cash declines.

/pdf/bank-market-power-and-central-bank-digital-currency-theory-2ukr6vvtaq.pdf

Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment

We present a policy framework for electronic money (e-money) and payments. The framework poses a set of positive questions related to the areas of responsibility of central banks: payment systems, ...

A Policy Framework for E-Money

The constrained efficient allocation (CE) is characterized in the model of Guerrieri, Shimer, and Wright (2010), a model of adverse selection and frictions in the directed (competitive) search theory. CE is defined to maximize the ex-ante utility of all types subject to the frictions in the environment, and is shown to achieve strictly higher welfare compared to equilibrium when equilibrium does not achieve the first best (socially efficient allocation under complete information). Under some conditions, CE even achieves the first best. Sufficient conditions are provided under which the equilibrium is Pareto inefficient. Cross-subsidization is the key to all these results. In an asset market application, the first best is shown to be implementable through tax schedules which are monotone in the asset prices.

/pdf/constrained-efficiency-with-adverse-selection-and-directed-3uaiugztlm.pdf

Constrained Efficiency with Adverse Selection and Directed Search

https://www.bankofcanada.ca/wp-content/uploads/2017/04/swp2017-15.pdf

Seyed Mohammadreza Davoodalhosseini

Papers

Central Bank Digital Currency and Monetary Policy

Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment

A Policy Framework for E-Money

Constrained Efficiency with Adverse Selection and Directed Search

Constrained efficiency with adverse selection and directed search