Assessing the Effective Lower Bound in the Context of Introducing the Digital Euro

Abstract

This study investigates the impact of central bank digital currencies (CBDCs) on monetary policy flexibility, the effective lower bound (ELB), and negative interest rate policies (NIRPs), specifically in the case of the digital euro (DE). Through a combination of theoretical modeling and empirical analysis, including two extensive surveys among EU participants, we explore whether CBDCs can change the ELB and affect consumer preferences in favor of the digital euro over physical cash. Our findings indicate that the introduction of the DE could potentially move the ELB from its current value of around −1.30% by approximately 0.25%. If agents had the possibility to move their deposits into both cash and DE, they would convert approximately 52% of the converted amount into cash and the rest into CBDCs. However, over a 10 year period, the situation would shift in favor of the DE, with a share of 63%. Both findings show that NIRPs will be more limited in the case of the introduction of CBDCs (DE). These facts must be considered both when deciding whether to introduce a CBDC (DE) and after its eventual introduction in the case of NIRP application.