Central Bank Digital Currency: When price and bank stability collide

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

MPRA Paper from University Library of Munich, Germany

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.

Keywords: CBDC; currency crises; monetary policy; bank 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: 2020-03-28, Revised 2022-05-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/113248/1/MPRA_paper_113248.pdf original version (application/pdf)

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 (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:pra:mprapa:113248

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().