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Monetary Policy Group, Bank of Thailand
December 2018
Digitalization on Financial Services and Implications for Monetary Policy in Thailand
Thematic Study 2018
Thitima ChucherdAcharawat Srisongkram
Thosapon Tonghui
Natta PiyakarnchanaSuparit Suwanik
Thanaphol Kongphalee
Bovonvich JindarakThiti TosborvornAniya Shimnoi
2
Financial innovation has been evolved over timee.g. e-Payment, e-Wallet, digital currencies
1960s
1980s
Barter Gold/coin Paper Money e-Payment Cryptocurrency
2000s
2010s618 AD 2000s1960s 1970s 1980s 1990s 2010s 2020s
Cellphone
2G 3G 4G 5G1G
Smartphone
Internet wolrd-wide-webPersonal computer
WiFi
Social media
Motivation
Remark: size of bubble = value of non-cash payment/GDP in 2016Sources: BIS statistics on payments and financial market infrastructures in the CPMI countries (Red Book statistics), Bank of Thailand
Chan
ge in
valu
e of
non
-cash
pay
men
t/GDP
du
ring 2
016-
2010
(tim
es)
Change in volume of non-cash payment/GDP during 2016-2010 (times)
in parallel with technological developmente.g. high-speed internet, smartphones, information technology,
block chain, and digital ledger technologies (DLT)
e-Payment has become increasingly important in most countries countriessignificantly
3
Scope of study
Electronic/Digital
Universally accessible
Central bank-issued
Peer-to-peer
Commodity money
Crypto-currency
CBDC(retail)
CBDC(wholesale)
Crypto-currency
(wholesale)Cash
Reserve accounts
Depositedcurrencyaccounts
Local currency
Virtual currency
Bank deposit,Mobile money,
e-Money
A taxonomy of money
Electronic payment (e-Payment) Digital currencies
Retail e-paymentCard paymentsInternet and mobile banking e-money
e-moneyCrypto-currencyCBDC
‘Digitalization’ in this paper
Source: BIS (2017)
• payment method has been developed and widely used, commonly linked to either bank or the 3rd party account
• An asset stored in electronic form that can serve essentially the same function as physical currency, namely, facilitating payments transactions
4
This paper aims to evaluate the impacts of digitalization in financial services on monetary policy in Thailand:
1. Understanding new development and trends pertaining to the digitalization including e-Payment and digital currencies and assessing its potential to permanently replace cash
2. Analyzing the implications for transmission and effectiveness of monetary policy
Objectives, Research questions, and Methodolody
Research questionse-Payment• How much retail e-Payment could substitute cash usage in Thailand?• How would e-Payment affect monetary aggregates, central bank's
balance sheet, velocity of money, money multiplier? How would this affect the transmission of monetary policy or monetary operations?
Digital currencies• How would the emergence of private digital currencies affect transmission
of monetary policy in 5 traditional channels?• What are the policy options available to central banks, and how
would this change the transmission of monetary policy?
Methodologye-Payment
- Literature review- Descriptive and empirical analysis• Monetary statistics• Substitution effect between
cash and e-Payment (GMM)• Monetary policy effectiveness
with and without e-payment (FAVAR)
Digital currencies- Literature review- Scenario analysis
Objectives
5
Outline
Part I e-Payment
I.I Development of cash usage behaviors and challenges in Thailand
I.II Empirical analysis of e-Payment and monetary policy
6
Cash usage in selected countries
Country PeriodCash usage
(% of transactions)
Cash usage (% of value)
Thailand 2017 93 -Euro area 2014–2016 79 54
Greece 2015–2016 88 75Italy 2015–2016 86 68Germany 2014 80 55France 2015–2016 68 28Finland 2015–2016 54 33Netherlands 2016 45 27
UK 2016 44 15US 2016 31 8Denmark 2017 23 16Sweden 2018 13 -Norway 2017-2018 11 6
Sources: Retail payment services 2017 Report, Norges Bank Survey of e-payment usage in Thailand in 2017, Payment Policy Department,
Bank of Thailand
0% 20% 40% 60% 80% 100%
60+
50-59
40-49
30-39
18-29
ATM transfer Debit card payment Credit card paymentInternet banking Mobile banking
0 50,000 100,000 150,000 200,000 250,000
60+
50-59
40-49
30-39
18-29 Non-cashCash
Cash usage (classified by age groups)e-Payment survey in Thailand (2017)
No. of monthly transactions for each person
e-Payment usage (classified by age groups)
Daily transactions in Thailand are mostly in cashTeenager and early working-aged groups are more welcome to non-cash usage esp. mobile/internet banking
Source: Survey of e-payment usage in Thailand in 2017, Payment Policy Department, Bank of Thailand
Part I e-PaymentDevelopment of cash usage behaviors and challenges in Thailand
7
0
50
100
150
200
0
1
2
3
2550 2552 2554 2556 2558 2560
cards
internet and mobile (RHS)
e-Money
0
10
20
30
40
2550 2552 2554 2556 2558 2560
Trillion baht
0
1
2
3
4
2550 2552 2554 2556 2558 2560
ATM or branchesinternet and mobilecardse-Money
Billion transactions
Value of retail payment
No. of retail payment Life cycle of payment services
Introduction Growth Saturation Decline
Debit cardCredit card
e-Money
Interbet banking
Mobile banking
Terminal Giros
Cheque
ATM
Terminal Giros
PC/Internet Giros
20182003Tr
ansa
ctio
ns
Norway
EFTPOS (mainly card payment)
Mail-based GirosGiros paid at counter
Source: Gresvik and Owre (2003), Rungsun Hataiseree (2008), and author’s estimates.
Introduction Growth Saturation Decline
e-Money
Debit cardCredit card
Internet bankingMobile banking
ATM Transfer
Counter TransferCheque
Cheque
ATM
Credit cardDebit card
Credit Transfer
e-Money
20182008Tr
ansa
ctio
ns
ThailandCash services at branch
e-Payment usage in Thailand still be in the early stage esp. Internet/mobile banking Value of payment per each transaction has been declined recently reflecting greater adoption of e-Payment in daily use
Part I e-PaymentDevelopment of cash usage behaviors and challenges in Thailand
Source: Bank of Thailand
Value of retail payment / transactionThousand baht
Thousand baht
8
Part I e-PaymentDevelopment of cash usage behaviors and challenges in Thailand
Cash transaction has declined continuously consistent with decelerating growth of cash in circulation
Growth of payment services
75
77
79
81
83
85
0.0
0.5
1.0
1.5
2.0
2550 2551 2552 2553 2554 2555 2556 2557 2558 2559 2560
Currency held by Depository Corp.Currency held by Gov.Currency outside DCs & Gov.Share of Currency outside DCs & Gov. (แกนขวา)
Trillion baht
Cash in circulation (classified by holders)
5
6
7
8
9
10
-4048
12162024
2550
Q125
50Q3
2551
Q125
51Q3
2552
Q125
52Q3
2553
Q125
53Q3
2554
Q125
54Q3
2555
Q125
55Q3
2556
Q125
56Q3
2557
Q125
57Q3
2558
Q125
58Q3
2559
Q125
59Q3
2560
Q125
60Q3
CIC growth CIC to GDP (%) RHS
-10% 0% 10% 20% 30% 40% 50% 60%
ATM withdraw
Counter withdraw
Cheque
ATM tranfser
Counter tranfser
Credit card
e-Money
Debit card
Internet&Mobile
man
ual
sem
iel
ectro
nic
2557255825592560
- 30,000- 20,000- 10,000
0 10,000 20,000 30,000 40,000
H2/2
557
H1/2
558
H2/2
558
H1/2
559
H2/2
559
H1/2
560
H2/2
560
H1/2
561
Cash deposit and withdrawalCash deposit Cash withdrawal
Billion baht
%
Avg. = 9.2%Avg. = 5.3%
Source: Bank of Thailand
9
0.00
0.05
0.10
0.15
0.20
0.25
0.30
1.00
1.50
2.00
2.50
3.00
2000Q1 2003Q1 2006Q1 2009Q1 2012Q1 2015Q1 2018Q1
Velocity of money
Base
Narrow
Broad (RHS)
6
7
8
9
10
11
12
13
14
0.91.01.11.21.31.41.51.61.7
2000Q1 2003Q1 2006Q1 2009Q1 2012Q1 2015Q1 2018Q1
Money multiplier
Broad (RHS)
Narrow
02468
1012141618
2001Q1 2004Q1 2007Q1 2010Q1 2013Q1 2016Q1
Growth of monetary aggregateBroad
Narrow
Base
%YoY
times
Despite slowdown in cash usage, velocity of money and money multiplier in Thailand are quite stable
0
5
10
15
20
25
0.0
0.5
1.0
1.5
2.0
2.5
2000Q1 2003Q1 2006Q1 2009Q1 2012Q1 2015Q1 2018Q1
trillion baht.Broad (RHS)
Narrow
CIC
CA
Monetary aggregate (seasonally adjusted)
Avg. 8.6%
Avg. 5.3%
Part I e-PaymentMonetary statistics
Source: Bank of Thailand and authors’ calculation
10
Unlike Sweden, cash in circulation continuously declines and velocity of money rises fast
Velocity of M0 Velocity of M1
Velocity of M2 Velocity of M3
Cash/GDP
SEK bil.
Source: Dalebrant (2016)
Part I e-PaymentMonetary statistics
Transition towards a cashless society in Sweden
11
Currency in circulation
(CIC)
Macroeconomic variables
Opportunity cost
e-Payment usage(value)
CEI
3-m deposit interest rate
Internet/mobile card payment e-Money-
Model I Model II Model III Model IVCoincident economic index 0.497 *** 0.517 *** 0.491 *** 0.211 *ST interest rate -0.012 *** -0.014 *** -0.012 *** -0.013 ***Retail e-payment -0.058 **Card payment -0.089 ***Internet and mobile banking -0.054 **e-money 0.023SET return -0.085 *** -0.090 *** -0.083 *** -0.087 ***C 0.060 *** 0.060 *** 0.059 *** 0.048 ***Adjusted R-squared 0.393 0.344 0.394 0.358
-
+
SET return
Source: Authors’ calculationRemark: This study employs generalized method of moments (GMM) approach, using monthly data from Jan10 to Jun18
***, **, * = statistical significance at 0.01, 0.05, and 0.1 respectivelyAll variables, except for deposit rates, are in real terms and expressed in log with the first-difference form
Our empirical study also shows that e-Payment usage in Thailand slightly substitutes cashIf Thai people use 1% more for retail e-Payment, demand for money will decline by 0.05 - 0.1%
However, e-Payment shows smaller impact on cash compared to economic activities and opportunity cost
Part I e-PaymentSubstitution effect on demand for money
12
Part I e-PaymentLiterature reviews
Past studies in e-Payment and implication on monetary policy are mostly descriptive and focus in digital moneyGrowing use of digital money could lessen central bank’s ability to control money supply under monetary targeting framework.
However, it will not affect monetary policy under inflation targeting
Area of study Implications for monetary policy
Monetary operation
- Reduce central bank’s control over money supply and complicate monetary operation under monetary targeting due to higher and more volatile velocity of money and money multiplier(Neda popovska-Kammnar 2014, Qin 2017)
Central bank independence
- Decline in CIC led to smaller amount of asset-backed currency and smaller size of central bank’s balance sheet that could affect monetary operation (Barentsen 1997, Rogoff 2014)
- Decline in CIC could lessen seigniorage that could affect central bank’s revenue to pursue its mission(Fung et al 2014, BOK 2005). However, no central bank reported that its balance sheet has been effected from decline in CIC (BIS Survey 2000)
Monetary policy transmission
- Credit channel e-money will turn cash usage in deposit transfer that could promote money creation process (ธรรมรักษ์ 2011, Payment system insight 2013)
- Information-based lending could facilitate greater credit approval (นันทวัลลิ์ 2018)- Digital money issuer (non-bank) and disintermidiation (Lagard, 2017)
- Exchange rate channel e-Payment supports international trade via e-commerce. However, buyers and sellers might reduce their FX risk by using foreign currencies for domestic spending (dollarization). If this behaviorbecomes more popular, policy rate could have smaller impact on domestic spending (only via its local currency)
- Asset price channel e-Payment reduces transaction cost that could make money demand more sensitive to interest rates (flatter money demand curve). When policy rates change, demand for money will adjust faster(IMF, 2004)
13
Part I e-PaymentMonetary policy implication
Greater use of e-payment in Thailand has no direct impact on monetary operation under inflation targeting using short-term interest rate as operational target. However, it will affect central bank undermonetary targeting framework since velocity of money and money multiplier are more unpredictable
Monetary operation
Excess reserve
Required reserve OMOs
Standing facilities
Autonomous factors
Demand for reserves Supply of reserves
Source: FAQ issue 32 (Roong Mallikamas, 2554)
• CIC (e-Payment not significantly affected this part yet)• Government
deposit• FX intervention• Other factors
Monetary targeting framework (1998-2000)
Estimate velocity of money (V)
from MV = PY
Estimate money multiplier (m) from M = mB
Inflation targeting framework (2000 - present)
Assess economic activities and economic outlook
Ultimate target: GDP and Price (PY)
Specify i=intermediate target:Money Supply (M = PY/V)
Specify operational target:Monetary Base (B = M/m)
Increase or absorb:to achieve operational target
via R/P or swap
D0 D0
D1
S0
S1
R0 R1=R0
i0 i0
i1
Interest rate
Reserve balance
1) MPC hikes policy rate
2) BOT will adjust interest rate corridor following new policy rate
3) The demand for reserve curve shifts upward consistence with the new liquidity management behavior
14
Part I e-PaymentMonetary policy implication
0
2,000
4,000
6,000
8,000
Source: Bank of Thailand and authors’ calculation
Assets Liabilities
Foreign assets Current account(CA)
Domestic assets Notes issued
… OMOs
2
3
1 Customers convert their cash to prepaid e-money (less cash usage)
E-money issuers are required to deposit prepaid cash at the bank
Under excess liquidity condition, banks will deposit this extra liquidity in CA at BOT and invest in OMOs to earn interest income
Payment system Act B.E. 2560 said that the e-money issuers have to deposit the float to the commercial bank only e-money spending purpose
Seigniorage
=∆𝑚𝑜𝑛𝑒𝑦 𝑟𝑒𝑠𝑒𝑟𝑣𝑒 − 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑖𝑠𝑠𝑢𝑖𝑛𝑔 𝑚𝑜𝑛𝑒𝑦
𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑝𝑟𝑖𝑐𝑒 𝑖𝑛𝑑𝑒𝑥
0.00
0.01
0.02
0.03
0.04
0.05
0.06
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Net interest rate income
Monetary seigniorage
ลลบ.
0
2,000
4,000
6,000
8,000
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
BOT’s balance sheet Asset
Bn THB
International assets
Domestic asset
Liability and equity
Open Market Operations(BOT Bond, BRP)
EquityBanknotes in circulation
1980-1985 1999-2001 2006-2017
0.3 0.1 0.08*
0
Source: Bank of Korea (2005) * Bank of Thailand and authors’ calculation
Source: Bank of Thailand balance sheet (CUR)
Despite more popular use of e-Payment in Thailand, cash still grows and seigniorage has not declined yet. The BOT’s balance sheet expands overtime from FX reserve accumulation.However, decline in cash could impact BOT balance sheet by changing structure of liabilities with greater composition of interest-bearing liabilities from OMOs and smaller portion of cash (non-interest bearing) with lower seigniorage
Central bank independence
1
2
3
% of GDP
15
Part I e-PaymentMonetary policy implication
Channels Effectiveness of monetary policy
Interest rate Status quo depending on Banks’ balance sheet, the elasticity of interest rate on demand for deposits and the competition in banking sector.
Credit Slightly more effective1. Banks can reduce cash operation and allocate larger amount of money kept in bank accounts for lending2. Digital banking help facilitate banks to gain benefit from information-based lending
Asset price More effective Saver can switch their saving into various forms of financial assets easily with lower transaction cost
Exchange rate Tend to be more effective e-Payment facilitates cross-border capital flows movement and promotes e-commerce transaction across countries. Exchange rate could be more volatile by greater volume of transactions
Expectation Status quo depending on business and households' views on economic outlook and policy rate path
MP ST rate LT rate
bank reserves
asset prices wealth
Supply of loan total demand
Interest rate diff. exchange rate
expectation
bank lending
balance sheet
Transmission Mechanism
16
Part I e-PaymentMonetary policy implication
Empirical study of MP transmission mechanism in Thailand
where Ft = unobserved vector (k x 1)Yt = observed vector (m x 1)ф L = coefficient matrix of lag orderν t = error term (zero mean with constant covariance matrix)
Ft
Yt = ф L
Ft-i
Yt-i + νt
Observed Variables
Inflation, CEI, RP
113 Unobserved Variables
Baseline model Alternative modelInflation, CEI, RP, e-Payment
Consumption and investment 11Production, Expectation and Labor indicators 22Real estate and Price indicators 18Interest rates 22Exchange rate 7Money and credit quantity aggregates 10External sector and capital flow 7Government sector 7Stock price, Oil price, Global policy rates 9Total 113
Factor-Augmented Vector Autoregressive (FAVAR) model:
Source BOT Staff’s calculationsFAVAR with 3(4) Observed Variables, 5 Factors and 1 lags. Sample: 2006M1-2018M6. The result shows Median and 90% Confidence Interval
Base modelAlternative Model
Impulse response of selected variables to policy rate shock (+100 basis points)
17
Part I e-PaymentMonetary policy implication
Source BOT Staff’s calculationsFAVAR with 3(4) Observed Variables, 5 Factors and 1 lags. Sample: 2006M1-2018M6. The result shows Median and 90% Confidence Interval
Impulse response of selected variables to policy rate shock (+100 basis points)
18
Role of foreign non-bank
e.g. Alipay, Wechat
Crypto and its substitution effect on e-Payment usage
Exponential growth of e-Payment usage and
payment policy
Consumer behavior Large-scale competition
Regulatory and supervisory role for private digital
money issuers
Disintermediation
Promoting digital payment amid an increasing role of non-bank and FinTech
“With the amount of electronic money still very small …, the effect on monetary policy is not yet absolutely determinable. However, the central banks and economists must try
to anticipate the effects before it becomes more significant. ” Reynolds G. and Stephen F. (2013) Electronic money and monetary policy
• Streamline laws and regulations to support innovations • Build Interoperable Payment Infrastructures to support all sectors and further development• Enhance cross-border payment efficiency• Strengthen cyber resilience to maintain stability and trust• Increase adoption as well as improve literacy for a sustainable development
Part I e-PaymentFuture trend of e-Payment
20
Part II Digital currenciesDefinitions and current situation
Digital Currency (DC)
Crypto-currency• a separate sub-class of digital currencies, with their distinguishing
feature depending on the consensus mechanism applied for updating the ledger (Barrdear and Kumhof, 2016)
Crypto-currency => Non-fiat backed currency
DefinitionsAn asset stored in electronic form that can serve essentially the same function as physical currency, namely, facilitating payments transactions (BIS 2015)
Current situation
• Crypto-currency performs very poorly the 3 functions of money (Ali et al., 2014) Medium of exchange: very few merchants accept them Unit of account: ambiguous as some merchants adjust prices according
to exchange rate fluctuations vis-à-vis fiat currencies Store of value: more volatile than national currency pairs
21
Uses of Digital Currency (not mutually exclusive)I. Wholesale (B2B)II. Retail (B2C and C2C)III. New Asset Class
Note: limit scope to exclude lending/borrowing of digital currencies
Means of exchange
Part II Digital currenciesScenario analysis
22
• Digital currencies are popular among businesses, while regular people still use cash at large
• DLT’s efficiency and traceability prompt some businesses to adopt crypto as their means of exchange
• This has already happened in some business sectors, e.g. Ripple
Possibility: Very likely How to get here?• We’re already here!• If people trust this alternative system more,
then more businesses will move here
Part II Digital currenciesScenario I: Wholesale
Implications for Monetary Policy Transmission
Transmission channels Scenario I (Wholesale)
Interest rate Status quo
Credit Status quo
Asset price Status quo
Exchange rate Status quo
Expectation Status quo
Scenario I: Wholesale
23
• Digital currencies become a popular means of payment in everyday transactions due to their ease of use and side benefits like tracking expenses, information-based lending, etc.
1. Pegged to THB => e-payment alike
2. Non-pegged to THB => we focus on this case
• Spectrum: Various degree of popularity and functions of money
Possibility: Likely (without central bank’s intervention) How to get here?• Non-banks are more superior than banks in
creating the required network effects
Part II Digital currenciesScenario II: Retail
Implications for Monetary Policy TransmissionScenario II: RetailTransmission
channelsScenario II (Retail)
Interest rate Less effective: smaller portion of monetary instrument is affected by interest rate
Credit Less effective: less demand for THB credit
Asset price Less effective: smaller portion of people’s wealth is affected by MP
Exchange rate Less effective: improvement of entrepreneur’s competitiveness via THB exchange rate is lessened
Expectation Indeterminate
24
Transmission channels
Scenario III(New Asset Class)
Interest rate Status quo
Credit Status quo
Asset price Indeterminate:• more asset choice for people
to invest in (Hawkins 2017) • the value of digital assets
depend on their properties.
Exchange rate Status quo
Expectation Status quo
• Digital currencies become digital assets instead
o e.g. cryptocurrencies, no longer functioned as means of exchange, become a conventional asset like stock, gold, or other commodities
Possibility: Likely How to get here?• Cryptocurrencies cannot become means of
exchange• The market becomes thicker, reducing the
volatility of the asset
Part II Digital currenciesScenario III: New Asset Class
Implications for Monetary Policy TransmissionScenario III: New Asset Class
25
Transmission channels
Scenario I(Wholesale)
Scenario II(Retail)
Scenario III(New Asset Class)
Interest rate Status quo Less effective Status quo
Credit Status quo Less effective Status quo
Asset price Status quo Less effective Indeterminate
Exchange rate Status quo Less effective Status quo
Expectation Status quo Indeterminate Status quo
Part II Digital currenciesScenario III: Summary of Scenarios
26
• Doing nothing?• e-Payment?• Stricter investment regulations on digital currencies?• CBDC as a policy tool?
• If CB offers competing products that would enhance consumers’ retail payment experience, that would curb retail use of non-bank wallets
How to deal with these scenarios then?
Part II Digital currenciesBottom line
27
“central bank-issued money that combine cryptography and DLTs” (BBVA)
o Digitize cash to improve efficiency in payments (BIS)
o Develop a new monetary policy tool to overcome zero-bound interest rates (BBVA, BIS)
o Maintain access to central bank money given increasing competition from private DCs and e-payment (BBVA, BIS)
o Maintain control over financial conditions (BBVA, BIS)
Part II Digital currenciesCentral Bank Digital Currency (CBDC)
What are CBDCs?
Why are central banks considering them?
28
• Design of each case is based on their purpose • Operational aspects will be disregarded for brevity
3 Design options of CBDC
Objective Accessibility Interest-bearing Example
Design “A” For Interbank Settlement Restricted : Wholesale Unremunerated Project Inthanon
Design “B” Similar to cash Universal : Retail Unremunerated E-Krona
Design “c” Policy Tool Universal : Retail Remunerated ???
Design featuresAccessibility
Interest-bearingUniversal
Non-zero
Limited
Zero
Continuity24 / 79 to 5
AnonymityIdentified Anonymous
Part II Digital currenciesCentral Bank Digital Currency (CBDC)
Types of CBDC under consideration
29
Analysis of impact on MP transmission will focus on how each case would affect balance sheet composition of each agent, in terms of both quantity (q) and price (p)
Key assumptions
1) Supply of CBDC is controlled by the central bank through a market-based mechanism whereby cash/assets are exchanged for CBDC tokens in-kind.
2) No change in MP framework (IT). Policy rate is the main policy tool (no QE).
Asset LiabilityBalance Sheet
Transmission Mechanism
Part II Digital currenciesAssessment Framework
30
CBDC Designs
Design A: Wholesale CBDC Design B: Unrenumerated Retail CBDC Design C: Renumerated Retail CBDC
Part II Digital currenciesCBDC Designs
31
MP Transmission channels Case A – Wholesale CBDC
Interest rate Status quo
Credit Status quo
Asset price Status quo
Exchange rate Status quo
Expectation Status quo
Wholesale CBDC is unlikely to affect MP transmission because it does not contend with the two-tier banking system and is just a change in infrastructure intended to improve efficiency of RTGS systems (BIS, 2018).
Central bankBond Reserves
International reserves - CBDC
Other assets - CIC
Other debtEquity
Comm. BankLoans BorrowingBond Deposits
Reserves Other debt - CBDC Equity - Cash
Other assets
Non-bank
Deposits Borrowing
Bond Others
Cash
CBDC
Other assets
Implications for Monetary Policy Transmission
Part II Digital currenciesDesign A – Wholesale CBDC
32
Channels Case B – Unrenumerated retail CBDC
Interest rate Status quo
Credit Status quo (except during stress: Shift from deposits to CBDC could impact bank funding and credit provision especially during stress periods (bank runs).) During normal times however, such shift is unlikely since deposits still pays interest.
Asset price Status quo
Exchange rate Status quo
Expectation Indeterminate (but might lead to higher ELB due to less carrying cost of ‘cash’)
Implications for Monetary Policy Transmission
Unrenumerated Retail CBDC might affect MP transmission during stress because it is a safe asset that could be considered a ‘safer’ alternative to bank deposits.
Part II Digital currenciesDesign B – Unrenumerated retail CBDC
Central bankBond Reserves
International reserves - CBDC
Other assets - CIC
Other debtEquity
Comm. BankLoans BorrowingBond Deposits
Reserves Other debt - CBDC Equity - Cash
Other assets
Non-bank Deposits Borrowing
Bond Others Cash CBDC
Other assets
33
Channels Case C – Renumerated retail CBDC
Interest rate More effective: Bank rates would become more sensitive to changes in the policy rate to prevent deposit flight (CPMI, 2017) and minimize opportunity costs. The policy rate would act as a interest rate floor/ceiling (Meaning et al, 2018).
Credit Less effective: Mass conversion from deposits to CBDC would affect bank’s lending capacity (Stevens, 2017; BIS, 2018).
Asset price More effective: Changes in policy rate directly affects wealth.
Exchange rate Status quo
Expectation More effective: No ELB allows central banks to send strong policy signals through extreme rate cuts, especially in the down cycle (Stevens, 2017)
Implications for Monetary Policy Transmission
Renumerated Retail CBDC could affect MP transmission significantly as it gives central banks stronger control over domestic financial conditions through the CBDC interest rate (policy rate).
Part II Digital currenciesDesign C – Renumerated retail CBDC
Central bankBond Reserves
International reserves - CBDC
Other assets - CIC
Other debtEquity
Comm. Bank Loans Borrowing
Bond Deposits
Reserves Other debt - CBDC Equity - Cash
Other assets
Non-bank Deposits Borrowing Bond Others Cash CBDC
Other assets
34
Part II Digital currenciesSummary of the implications of CBDC designs
Channels Design A(Wholesale)
Design B(Unrenumerated Retail)
Design C(Renumerated Retail)
Interest rate Status quo Status quobut may cause one-time
shift in bank rates
More effective
Credit Status quo Status quo(except during stress)
Less effective
Asset price Status quo Status quo More effective
Exchange rate Status quo Status quo Status quo
Expectation Status quo Indeterminate More effective
Disintermediation of commercial banks / emergence of narrow-banking
• Retail banking would face direct competition from central banks narrow banking with the result threat to aggregate credit (BBVA, 2017)
Validity of ELB argument
• Negative interest rate policy (NIRP) not be politically feasible.
• Eliminating larger bank notes to increases costs of holding cash lowers ELB (Rogoff, 2016; Engert, 2017)
Financial stability implications
• Banks may engage in high risk lending to offset higher funding cost (BIS, 2018)
• CBDCs allow for ‘digital runs’ towards the central bank with unpredecented speed and scale (BIS, 2018)
Autonomy problem
• Loss of seigniorage income might not an issue for some central banks (Engert, 2017)
• Unlikely that cryptocurrencies will completely replace fiat currencies unless there is massive lost of trust in the central bank. Central banks must maintain trust through credible policies (He, 2018)
Part II Digital currenciesAre retail CBDCs really the solution to the autonomy problem?
• With increasing competition from private DCs would force central bank to move towards CBDCs.
• However, central banks must carefully weigh the implications for financial stability and monetary policy of issuing each case of CBDC.
Part II Digital currenciesBottom line
Issues for consideration Case “A” Case “B” Case “C”
Perform full functions of money
Able to compete with retail crypto-currencies -
Net Impact on MP transmission mechanism Status quo Status quo More effective
Financial stability issues - - • Narrow banking• Moral Hazard
e-Payment• How much retail e-payment could substitute cash usage in Thailand?
Small substitution effect
• How would e-payment affect monetary aggregates, central bank's balance sheet, velocity of money, money multiplier? How would this affect the transmission of monetary policy or monetary operations? Not yet observe any negative impact from e-Payment on monetary operation in the transition
toward less-cash society. E-payment trend strengthens MP transmission via credit and asset price channels.
Conclusione-Payment & Digital Currencies
Digital Currencies• How would the emergence of private digital currencies affect transmission of monetary policy in 5
traditional channels? Most likely affect through credit and asset price channels (depends on each scenario)
• What are the policy options available to central banks, and how would this change the transmission of monetary policy? e-Payment, Regulations, CBDC
“Central banks must maintain the public’s trust in fiat currencies and stay in the game in a digital, sharing, and decentralized service economy.”
Dong HeDeputy Director, IMF
Monetary Policy in the Digital Age, June 2018
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