Intl Conference on Economics, Finance & Business, Paris

CENTRAL BANK DIGITAL CURRENCY AND CASH: CHOICE BASED ON BAUMOL'S THEORY

FENGQI XIE

Abstract:

With the rapid growth of the digital economy, digital currency has emerged as a prominent area of research. Central Bank Digital Currency (CBDC), issued by the central bank and backed by its liability, has garnered significant attention. This article builds upon Baumol's money demand theory to conduct an extensive analysis of the factors influencing the choice between cash and CBDC, as well as the selection of currency usage. It finds that the decision to adopt either cash or CBDC is often driven by the lower holding costs associated with the latter. Additionally, various factors such as public perception, government policies, and social acceptance contribute to the prolonged coexistence of cash and CBDC. Although CBDC in their current state may not completely replace traditional currencies, they are projected to have a substantial impact on the future of financial transactions.

Keywords: Digitalization, central bank digital currency, CBDC, cash, Baumol's money demand theory