BIS Working Papers No 1126 CBDC and the operational framework of monetary policy by Jorge Abad, Galo Nuño and Carlos Thomas Monetary and Economic Department September 2023 JEL classification: E42, E44, E52, G21. Keywords: central bank digital currency, interbank market, search and matching frictions, reserves. BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2023. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 (print) ISSN 1682-7678 (online) CBDC and the operational framework of monetarypolicy∗Jorge Abad†Galo Nuño†,‡Carlos Thomas††Banco de España‡Bank of International SettlementsFirst version: February 2021This version: September 2023AbstractWe analyze the impact of introducing a central bank-issued digital currency(CBDC) on the operational framework of monetary policy and the macroeconomyas a whole. To this end, we develop a New Keynesian model with heterogeneousbanks, a frictional interbank market, a central bank with deposit and lending facil-ities, and household preferences for different liquid assets. The model is calibratedto replicate the main monetary and financial aggregates in the euro area. Our anal-ysis predicts that CBDC adoption implies a roughly equivalent reduction in banks’deposit funding. However, this ‘deposit crunch’ has a rather small effect on banklending to the real economy, and hence on aggregate investment and GDP. Thisresult reflects the parallel impact of CBDC on the central bank’s operational frame-work. For relatively moderate CBDC adoption levels, the reduction in deposits isabsorbed by an almost one-to-one fall in reserves at the central bank, implying atransition from a ’floor’ system –with ample reserves– to a ‘corridor’ one. For largerCBCD adoption, the loss of bank deposits is compensated by increased recourse tocentral bank credit, as the corridor system gives way to a ‘ceiling’ one with scarcereserves.Keywords: central bank digital currency, interbank market, search and matchingfrictions, reserves.JEL codes: E42, E44, E52, G21.∗Corresponding author: Jorge Abad (jorgeabad@bde.es). The views expressed in this manuscript arethose of the authors and do not necessarily represent the views of the BIS, the Banco de España, or theEurosystem. We would like to thank Ben Hemingway, Joël Marbet, Manuel Muñoz, Dirk Niepelt, FrankSmets, Javier Suarez, and Anton van Boxtel, as well as the participants at numerous conferences andseminars. All remaining errors are ours.1 1 IntroductionThe potential introduction of a central bank digital currency (CBDC) has gained increas-ing attention in recent years among policymakers and academics. In March 2022, USPresident Biden’s Executive Order on Ensuring Responsible Development of Digital As-sets placed “the highest urgency on research and development efforts into the potentialdesign and deployment options of a United States CBDC”. Similarly, the European Cen-tral Bank is analyzing the implications of the potential launch of a “digital euro”, that is,a euro-area CBDC.While the academic literature has thoroughly analyzed the potential implications ofCBDC for financial stability and monetary policy transmission, much less attention hasbeen devoted to its impact on monetary policy implementation and how this is likely toshape the macroeconomic effects of CBDC.1Nowadays, most central banks in advancedeconomies operate a “floor system” in which banks’ demand for liquidity is satiated withan ample supply of central bank reserves (“excess reserves”), and interbank market ratesare effectively controlled by the interest rate on overnight deposits at the central bank.2The introduction of a CBDC has the potential to affect the operational framework ofmonetary policy and the conditions in interbank markets if it brings about a sufficientlylarge decrease in excess reserves due to the reduction in bank deposits. This, in turn, mayhave important macroeconomic implications, both in the long run and in the transitionalCBDC adoption phase.This paper analyzes the implications of the introduction of CBDC for the operationalframework of monetary policy and for the macroeconomy as a whole. To this end, we in-troduce CBDC in a tractable New Keynesian model with heterogeneous banks, a frictionalinterbank market, and central bank standing (deposit and lending) facilities. Our modelfeatures banks that differ in the investment opportunities they face, which motivates the1See Infante et al. (2022) for a broad revisi