CEF.UP – WiP Seminar/Webinar

Friday – May 24^th, 2024 at 13:00h (1 pm) | Room 305 | Online

The Political Economy of Central Bank Digital Currencies and Monetary Policy

Francisco Nunes Pereira – FEP – School of Economics and Management, University of Porto and Cef.Up

Abstract:

This paper scrutinizes the monetary policy case in favor of Central Bank Digital Currencies (CBDCs) from a political economy angle. The proponents of CBDCs argue that their introduction would streamline the monetary policy transmission mechanism, enable novel policy interventions, and enhance data collection capabilities, ultimately leading to improved central bank performance. However, the arrangements of monetary institutions result in central banks entangled in incentive and epistemic issues, which limit their performance. CBDCs not only fail to mitigate these problems but indeed exacerbate them. We argue that the central bank becomes more vulnerable to political interference and rent-seeking activities once a CBDC is created. Moreover, the enhanced ability to monitor economic activities may lead central banks to succumb to the ‘pretense of knowledge syndrome,’ which compounds the incentives for discretionary interventions. We conclude that there is a means-ends inconsistency in the monetary policy case for CBDCs.