Central Bank Digital Currency: When price and bank stability collide

Schilling, Linda and Fernandez-Villaverde, Jesus and Uhlig, Harald (2020): Central Bank Digital Currency: When price and bank stability collide.

Abstract

When a central bank introduces a central bank digital currency, it may lead to an erosion of deposits as the stable funding base of banks and result in challenges regarding the asset side of the central bank. We study the resulting economy and tradeoffs in a stylized nominal version of the Diamond-Dybvig (1983) model. The central bank is now involved in maturity transformation, if it so chooses. We posit that the central bank pursues three objectives: price stability, economic efficiency and financial stability. We demonstrate that a CBDC Trilemma arises: out of these three objectives, the central bank can achieve at most two. In particular, a commitment to price stability can cause a run on the central bank. Implementation of the socially optimal allocation requires a commitment to inflation.

• Item Type: MPRA Paper
• Language: English
• Keywords: CBDC, currency crises, monetary policy, bank runs, financial intermediation, central bank digital currency, inflation targeting
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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