Many central banks are contemplating whether to issue a central bank digital currency (CBDC). A CBDC can allow for different interest rates on different balances or on different types of accounts—such as different rates for households than for businesses or for different sectors of the economy. This flexibility can help central banks implement monetary policy more effectively and achieve higher welfare.

We quantify the welfare gains of a CBDC that come from its interest-bearing feature and show that they can be sizable. For example, for Canada, the gains from introducing a CBDC are estimated to be an increase in consumption of around 0.16 per cent.

Nevertheless, some agents may prefer cash over a CBDC, perhaps because using cash allows them to remain anonymous in transactions. Having both cash and a CBDC available to agents sometimes results in lower welfare than when having only cash or only a CBDC available. This finding suggests that removing cash from circulation may be a welfare-enhancing policy if the motivation to introduce a CBDC is to improve the effectiveness of monetary policy.