No. 56 - A general framework to assess the smooth implementation of monetary policy: an application to the introduction of the digital euro
This paper proposes a methodological framework for estimating the maximum amount of digital euro (D€) that is consistent with a smooth monetary policy implementation (MPI) in the euro area (EA). To this end, we consider that monetary policy is implemented smoothly following the introduction of the D€ when i) the remaining aggregate liquidity in the EA is sufficient to anchor short-term rates to the deposit facility rate and ii) EA national banking sectors can largely meet D€ demand with excess reserves and additional central bank credit. We estimate that, for a smooth MPI, the maximum amount of D€ should not exceed EUR 1.7 tn under an approach that takes into account the heterogeneity across EA countries and banks and prevents any EA national banking sector from facing a too severe liquidity distress following the introduction of the D€. Our analysis suggests the importance of refinancing operations with a broad collateral framework in the Eurosystem operational framework, due to their key role in allowing the central bank to elastically withstand additional reserve demand stemming from the introduction of the D€.
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