BUSI 606 Week 1 DB Forum 1: Parts A and B Example

Discussion Board Forum 1: Parts A and B, Key Topic and Thread

BUSI 606 Global Financial Markets, Discussion Board Forum 1: Parts A and B (key topic and thread)

Thread by [Student Name]

The key topic was chosen for this sample, and the section labels stand in for the course's own forum instructions; the five articles are real and published within five years of the course date, and the requirements follow Liberty's public course guide for BUSI 606.

Part A: Key Topic Submission

My key topic is central bank digital currencies (CBDCs). The topic connects directly to the opening chapters on the roles of central banks and commercial banks in the financial system, because a CBDC would change who holds the public's money and how banks fund their lending.

Part B: Thread

A central bank digital currency is a digital form of money issued directly by a central bank. A retail CBDC would be available to households and businesses for everyday payments, much like a digital version of cash, while a wholesale CBDC would be used only for settlement between financial institutions. Today, the public's digital money consists almost entirely of commercial bank deposits; only cash is a direct claim on the central bank. A retail CBDC would change that.

Interest is widespread. Auer et al. (2022) review the motives that have led most central banks to study CBDCs: making payments faster and cheaper, extending access to people without bank accounts, preserving a role for public money as cash use declines and responding to private digital money, such as stablecoins and payment systems run by large technology firms. China has piloted its digital renminbi in many cities, the Bahamas launched a retail CBDC in 2020, and the European Central Bank moved into a preparation phase for a digital euro in 2023. The United States has taken a different course; in January 2025 an executive order barred federal agencies from establishing a CBDC.

The central question for financial markets is what a retail CBDC would do to banks. Fernández-Villaverde et al. (2021) showed that if households could hold safe accounts directly at the central bank, the central bank could attract deposits away from commercial banks and become, in effect, a deposit monopolist, which would require it to take over the lending that banks fund with deposits. Keister and Sanches (2023) described the trade-off more precisely: a CBDC can make payments more efficient, but if it crowds out bank deposits, banks' funding costs rise and investment falls. The design of the currency, not its existence, determines which effect dominates.

Other research is more optimistic. Chiu et al. (2023) noted that banks have market power in setting deposit rates and often pay depositors less than competitive rates. In their model, calibrated to U.S. data, an interest-bearing CBDC could raise bank lending and output within a range of interest rates, because banks would have to offer better deposit terms to keep customers, which increases deposits rather than draining them. Williamson (2022) found that a CBDC could improve welfare compared with physical currency, with the size and sign of its effects depending on how the central bank manages the assets that back it.

For bank managers, the debate suggests two implications. First, the threat to deposits depends on design choices still being made, such as limits on how much a person may hold, whether the CBDC pays interest and whether banks distribute it. Second, competition for deposits is likely to intensify in any case, from CBDCs abroad, stablecoins and digital payment platforms, so banks should invest in the relationships and services that keep customers' deposits, rather than relying on depositors' inertia. Smaller banks, which depend most heavily on deposits to fund loans, have the most at stake. For investors and regulators, the research also points to a stability question: in a crisis, depositors might move money into a risk-free CBDC far faster than they could withdraw cash, so any CBDC design would need safeguards against digital bank runs.

References

Auer, R., Frost, J., Gambacorta, L., Monnet, C., Rice, T., & Shin, H. S. (2022). Central bank digital currencies: Motives, economic implications, and the research frontier. Annual Review of Economics, 14, 697-721. https://doi.org/10.1146/annurev-economics-051420-020324

Chiu, J., Davoodalhosseini, S. M., Jiang, J., & Zhu, Y. (2023). Bank market power and central bank digital currency: Theory and quantitative assessment. Journal of Political Economy, 131(5), 1213-1248. https://doi.org/10.1086/722517

Fernández-Villaverde, J., Sanches, D., Schilling, L., & Uhlig, H. (2021). Central bank digital currency: Central banking for all? Review of Economic Dynamics, 41, 225-242. https://doi.org/10.1016/j.red.2020.12.004

Keister, T., & Sanches, D. (2023). Should central banks issue digital currency? The Review of Economic Studies, 90(1), 404-431. https://doi.org/10.1093/restud/rdac017

Williamson, S. (2022). Central bank digital currency: Welfare and policy implications. Journal of Political Economy, 130(11), 2829-2861. https://doi.org/10.1086/720457