Taiwanese Central Bank Vice President's Article: Retail CBDC May Help Tackle Inflation, but Central Bank Disintermediation Poses Risks

Taiwan's Deputy Central Bank Governor Chen Nan-Kuang and Council Member Li Rong-Qian co-authored two articles in the August issue of Taiwan Banker magazine, titled "From Tradition to Present - The Evolution and Development of the Central Bank's Policy Role" and "Looking to the Future from the Present - Opportunities and Challenges for the Central Bank's Involvement in the Quasi-Fiscal Field".

These articles mainly explain the changing roles of central banks throughout history. Today, in addition to being the government's bank (treasury operations), the bank's bank (core of the banking network and payment systems), it also serves as a provider of market liquidity.

Facing the economic crisis caused by the current pandemic, Deputy Governor Chen Nan-Kuang wrote: "The unconventional monetary policies and credit policies enacted by the central bank to respond to the crisis have deepened and broadened the central bank's direct involvement in financial markets and economic activities, thereby expanding its influence."

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Unlimited Money Printing, Is the Central Bank Losing Control?

The article suggests that some argue the central bank's main policy objective has shifted from maintaining monetary and financial stability to implicitly pursuing economic growth, resulting in a significant transformation of its role, resorting to any means necessary to achieve its policies.

It describes that the central bank's unlimited money printing is solely reflected on its balance sheet as currency created for relief efforts, without becoming government debt. Unlike government debt that needs to be redeemed upon maturity, central bank reserve debt does not require such redemption, making the monetization of government debt quite attractive. However, reserve debt poses the risk of inflation. The article comments, "Monetizing government debt only shifts the credit risk of government debt to inflation risk."

Retail CBDC May Aid Monetary Policy, But Lean Towards Two-Tier Structure

The article mentions the emergence of ultra-loose monetary policies (zero interest rates, unlimited quantitative easing, etc.), with major central banks releasing large amounts of strong currency, yet inflation rates and expectations in major economies remain low and stable, raising concerns about asset bubbles. Whether the effectiveness of monetary policy has changed is a question worthy of deep consideration by central banks.

It also discusses how central bank digital currency (CBDC) could potentially assist monetary policy. Using retail CBDC as an example, the central bank directly opens electronic currency accounts for the public and businesses to use. The article states, "The government can transfer electronic currency balances directly to the public, and it can also provide an environment for the central bank to implement negative interest rate policies, preventing hoarding of cash by the public and effectively boosting private consumption."

However, the article believes that this would increase the central bank's business and risks, eliminating the intermediary role of commercial banks, posing risks to financial stability. It argues that banks should maintain the current two-tier structure to fulfill their role in the payment system.

It is reported that China's central bank digital currency DCEP is designed to maintain a two-tier structure, integrating the use of DCEP into the circulation of M0 cash.