Central bank digital currency: When price and bank stability collide

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

Journal of Monetary Economics, 2024, vol. 145, issue C

Abstract: This paper shows the existence of a central bank trilemma. When a central bank is involved in financial intermediation, either directly through a central bank digital currency (CBDC) or indirectly through other policy instruments, it can only achieve two of three objectives: a socially efficient allocation, financial stability (i.e., absence of runs), and price stability. 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. We illustrate this idea through a nominal version of the Diamond and Dybvig (1983) model. Our perspective may be particularly appropriate when CBDCs are introduced on a wide scale.

Keywords: CBDC; Currency crises; Monetary policy; Bank runs; Spending runs; Financial intermediation; Central bank digital currency; Inflation targeting (search for similar items in EconPapers)
JEL-codes: E58 G21 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304393224000072
Full text for ScienceDirect subscribers only

Related works:
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)
Working Paper: Central Bank Digital Currency: When Price and Bank Stability Collide (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:145:y:2024:i:c:s0304393224000072

DOI: 10.1016/j.jmoneco.2024.01.007

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().