It is important to consider the impact of CBDCs on inflation given that 2021 and 2022 have seen rising inflation globally, at least partly due to Covid, a manufacturing and supply chain slowdown, and geopolitical factors.
While individual central banks have their specific mandates, all of them have a role to play in targeting price stability. One obvious way central banks ensure stability is through the target interest rate, which directly impacts capital markets and flows through to the real economy.
CBDCs will not cause inflation, but can give a central bank more direct tools to execute monetary and fiscal policy that they do not currently have. Monetary transmission can be instant; there is no need to wait for rate changes to be executed by commercial banks before having an impact on citizens. A central bank is also able to impose negative interest rates on a CBDC, overcoming the zero-lower bound if they so choose.
Moreover, a full implementation of a CBDC provides an indisputable proof of the official money supply. Current research suggests that central banks are managing policy based on a best estimate, not concrete fact.
A digital money supply does not need to rely on approximation; the volume of cash and/or money is provable. Targeting a long-term inflation rate relies on having strong macroeconomic data. CBDCs can give more granular data in real-time; the source of which is trusted—on an immutable ledger, for example.
Gathering such data, in a well-designed CBDC, can be achieved without citizens giving up privacy or reducing their rights to conduct business. This allows authorities to track changes in terms of the pricing and velocity of money instantly, meaning price stability does not need to rely on lagging indicators which report on volatility after the trend. CBDCs can therefore give a central bank better visibility on the impact of policy on the economy.
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