Central banks have varying objectives, but their common long-term policy goal is to achieve price stability. To attain this goal, they may adopt different monetary policy regimes, including inflation targeting, exchange rate targeting, and monetary targeting. Currently, most major advanced economies and emerging markets and developing economies have adopted an inflation-targeting regime, while many small open economies with a high reliance on international trade and investment opt for exchange rate targeting. Monetary targeting, however, has become less popular.
CBDC can, to some degree, substitute for cash to the extent that retail users wish to switch from physical to digital central bank money. Second, CBDC can substitute for some of the commercial bank deposits held by households, firms, or NBFIs. In turn, this would affect the amount of reserves held in the banking system. Third, CBDC can substitute for central banks reserves directly if commercial banks settle interbank payments in CBDC instead of reserves held in traditional real-time gross settlement systems. The first two scenarios are often referred to as “retail CBDC,” while the third scenario is referred to as “wholesale CBDC.”
CBDC may affect central banks’ ability to forecast liquidity, may draw market rates away from the policy target, and can complicate banks’ liquidity management operations. However, this note suggests that such adverse impacts may be attenuated by appropriately adapting the operations or CBDC design. This includes engaging in fine-tuning operations, providing more liquidity to the banking sector, and treating CBDC and reserves similar to the extent CBDC is available to commercial banks.
