A central bank-run digital currency to rival cryptocurrencies such bitcoin and ethereum could make monetary policy changes a more effective tool, according to Bank of England research.
The Bank has recently released a flurry of research weighing the potential risks and benefits of central bank digital currency (CBDC), with the potential to revolutionise monetary policy.
“A CBDC that is a close – but not perfect – substitute for bank deposits may strengthen the transmission of monetary policy changes to the real economy”, according to a blog post published today by Bank researchers Jack Meaning and Ben Dyson summarising recent research.
The Bank says it is not currently planning to issue its own digital currency, which Swedens Riksbank is actively considering.
Nevertheless, the Bank has undertaken a significant body of work investigating how a central bank digital currency would work in practice, including a separate research paper which claimed an important “step forward” in the design of a currency which would not leave commercial bank vulnerable to a run.
The research on monetary policy transmission shows that a currency which pays interest on balances, alongside offering payment services, would allow the Bank of England to gain greater control over monetary policy.
“With careful design choices, a CBDC need not be disruptive to the conduct of monetary policy,” the researchers wrote.
Commercial banks would be forced to react more quickly than they do currently to raise or lower interest rates in line with the central bank rate to avoid losing deposits.
The authors said: “This would result in an increase in both the strength and speed of pass-through from the policy rate to these other interest rates, especially as technology and regulatory changes make it easier to switch balances from one account to another.”
The prospective currency would also greatly improve the functioning of quantitative easing, the asset purchases used by central banks to stimulate demand when interest rates cannot fall any further.
A digital currency would remove the need for banks as an intermediary for buying the government bonds used in quantitative easing, the researchers said: “The central bank could pay for assets from non-banks directly with central bank money (CBDC), by-passing the banking sector altogether.”
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