Core Focus: The role of the interbank market in amplifying monetary policy shocks in a CBDC environment, and the critical distinction between CBDC as a substitute for or complement to bank deposits.

In-Depth Notes:
The interbank market plays a critical and often underappreciated role in the transmission of monetary policy in a CBDC environment. Research using a New Keynesian DSGE framework with heterogeneous banks and an interbank market has found that the interbank market amplifies monetary policy shocks compared to a baseline scenario where the interbank market is absent or non-functional .

The Amplification Mechanism:
Within the interbank setting, whether CBDC acts as a substitute for, or a complement to, bank deposits plays a crucial role in either dampening or amplifying the transmission of monetary policy shocks . Monetary policy conducted through the traditional Taylor-rule-based interest rate on reserves becomes markedly more powerful in the presence of an active interbank market . The presence of liquidity shocks is critical in shaping outcomes in the presence of an interbank market. This amplification effect extends to exogenous liquidity shocks affecting the premium between government bond yields and policy rates.

The Attenuating Effect of CBDC Interest Rates:
Consistent with current policy discussions on remunerating CBDC holdings, research finds that an interest rate on CBDCs exerts an attenuating effect on interbank amplification . This constitutes a novel contribution to the CBDC literature and highlights the importance of considering interbank market structure and functioning when designing interest rate policies in a CBDC environment. The attenuating effect suggests that careful calibration of CBDC remuneration can help manage the amplification of policy shocks through the interbank system.

Impact on the Operational Framework:
The introduction of CBDC affects the operational framework of monetary policy, influencing whether the system operates in a “floor,” “corridor,” or “ceiling” regime. CBDC adoption implies a contraction in bank deposits, which is absorbed by a fall in reserves and, if large enough, increased recourse to central bank credit . The resulting changes in the operational framework shape the impact of CBDC on credit, investment, and output. This suggests that the transition to a CBDC environment will require recalibration of central bank operational frameworks to account for changes in reserve demand and interbank market dynamics.