Speakers:
Haoxiang Zhu is Gordon Y Billard Professor of Management and Finance and Associate Professor of Finance at the MIT Sloan School of Management. He is also a Research Associate at the National Bureau of Economic Research, a Faculty Affiliate of the MIT Golub Center for Finance and Policy, and a Faculty Affiliate of the MIT Laboratory for Financial Engineering. He currently serves as a finance Department Editor of Management Science and an Associate Editor of Journal of Finance.
Recap:
Haoxiang Zhu presented his paper “On Interest-Bearing Central Bank Digital Currency with Heterogeneous Banks.” The paper was co-authored with Professor Rod Garratt of University of California Santa Barbara Santa Barbara who was also on the zoom session.
The paper explored the implications of introducing an interest-bearing central bank digital currency (CBDC) through commercial banks. It assumed a heterogeneous mix of banks (by size), a factor not sufficiently address in previous literature. This is important to consider since small banks often have social impact in their local communities.
The study began by looking at the difference between small and large banks as interest rates on reserves (IOR) change. Small banks deposit rates are higher and more responsive to IOR in a proportional way, and they gain deposit share when rates are higher. They also gain lending market share in the model with rising IOR.
The authors built a representative agent model that tries to model rational behavior. In this model, for consumers there are deposit interest rates and convenience. Convenience is higher for big banks. Intuitively this is because a CBDC competes with bank deposits, thus a CBDC with a similar convenience value but higher interest rate. In contrast to IOR changes, the introduction of interest bearing CBDC generally reduces the market share of small banks, but has a mixed result on deposit rates and loan volume. Because CBDC establishes a floor on bank deposit rates, a high uniform bar across banks ends up raising the deposits at large banks which win deposits due to high convenience.
During the Q&A, Darrell Duffie (Stanford University) asked if such a digital currency needs to be central bank currency. He used Alipay and WeChat pay deposits as examples of non central bank deposits that nonetheless gained market share from offering high convenience and high interest rates.
Zhiguo He (The University of Chicago Booth School of Business) asked what the role of the CBDC is, to make it more responsive to central bank monetary policy? The authors did not try to define any explicit goals on monetary authorities. For example, perhaps raising large bank loan threshold would lead to better loan quality. But this paper did not consider that yet. In their model, deciding the rate determines (1) the welfare of depositors and lenders (2) relative market share of small vs large banks and (3) loan volume and quality. There are other factors not in the model, but it goes to show how it is an important question. Optimizing CBDC rate between 0% and f% is a question that need to be answered.
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