Central Bank Digital Currency: When Price and Bank Stability Collide

Linda Schilling, Jesus Fernandez-Villaverde and Harald Uhlig ()

No 8773, CESifo Working Paper Series from CESifo

Abstract: A central bank digital currency, or CBDC, may provide an attractive alternative to traditional demand deposits held in private banks. When offering CBDC accounts, the central bank needs to confront classic issues of banking: conducting maturity transformation while providing liquidity to private customers who suffer “spending” shocks. We analyze these issues in a nominal version of a Diamond and Dybvig (1983) model, with an additional and exogenous price stability objective for the central bank. While the central bank can always deliver on its nominal obligations, runs can nonetheless occur, manifesting themselves either as excessive real asset liquidation or as a failure to maintain price stability. We demonstrate an impossibility result that we call the CBDC trilemma: of the three goals of efficiency, financial stability (i.e., absence of runs), and price stability, the central bank can achieve at most two.

Keywords: central bank digital currency; monetary policy; bank runs; financial intermediation; inflation targeting; CBDC trilemma (search for similar items in EconPapers)
JEL-codes: E58 G21 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (58)

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Related works:
Journal Article: Central bank digital currency: When price and bank stability collide (2024)
Working Paper: Central bank digital currency: when price and bank stability collide (2024)
Working Paper: Central Bank Digital Currency: When price and bank stability collide (2022)
Working Paper: Central bank digital currency: When price and bank stability collide (2022)
Working Paper: Central Bank Digital Currency: When Price and Bank Stability Collide (2020)
Working Paper: Central Bank Digital Currency: When Price and Bank Stability Collide (2020)
Working Paper: Central Bank Digital Currency: When Price and Bank Stability Collide (2020)
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