Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 424: Private Bank Money vs Central Bank Money: A Historical Lesson for CBDC Introduction

Anna Grodecka-Messi () and Xin Zhang ()
Additional contact information
Anna Grodecka-Messi: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Xin Zhang: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: Central banks have been considering the introduction of central bank digital currencies (CBDCs). The theoretical literature indicates that this may influence private banks’ lending activity and their profitability with implications for financial stability. To provide empirical evi dence on this debate, we study the effects of the arrival of a new central-bank issued currency on commercial banks in a historical setup. We use the opening of the Bank of Canada in 1935 as a natural experiment to provide evidence that banks mostly affected by the currency competition experienced lower profitability but did not decrease their lending compared to unaffected peers.

Keywords: Money and Banking; Central Bank Digital Currencies; Central Banks; Bank Profitability; Bank Lending; Bank of Canada; Banknote Monopoly

JEL-codes: E42; E50; G21; G28; N22

Language: English

41 pages, First version: June 1, 2023. Revised: July 1, 2023. Earlier revisions: July 1, 2023.

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