Banking Crises and Central Bank Digital Currency in a Monetary Economy

Makoto Watanabe and Tarishi Matsuoka

No 25-015E, CIGS Working Paper Series from The Canon Institute for Global Studies

Abstract: This paper examines the role of Central Bank Digital Currency (CBDC) in a monetary model in which fundamental-based bank runs arise endogenously. We demonstrate that introducing a CBDC designed to replicate the properties of cash displaces physical cash and, when offered at a sufficiently attractive rate, can increase the likelihood of a bank run. In contrast, when the CBDC is designed to resemble bank deposits, cash, CBDC, and deposits can coexist as media of exchange, and a high CBDC rate can eliminate the risk of runs. We further characterize the optimal CBDC policy within this framework.

Pages: 46
Date: 2025-06
New Economics Papers: this item is included in nep-dge, nep-mon and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:cnn:wpaper:25-015e

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