Central bank digital currencies and financial stability in a modern monetary system

David Tercero-Lucas

Journal of Financial Stability, 2023, vol. 69, issue C

Abstract: The aim of this study is to disentangle the effects of introducing an interest-bearing central bank digital currency (CBDC) for financial stability using a Diamond and Dybvig (1983) model in which (i) both CBDC and private bank deposits can be used in exchange and (ii) liquidity is created endogenously. Agents have direct access to a CBDC, which is a claim on the central bank. They use both sight deposits and CBDC to buy goods and commercial banks borrow reserves to cover liquidity needs. The introduction of an interest-bearing CBDC has direct implications for the sight deposit rate and the loan rate of banks. Besides, if the central bank aims to have a positive net worth and the absence of bank runs, a high demand for a CBDC is a necessary condition to achieve both objectives. If this is not the case, financial stability will be endangered.

Keywords: CBDC; Banking sector; Financial stability; Bank runs (search for similar items in EconPapers)
JEL-codes: E42 E58 G21 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:69:y:2023:i:c:s1572308923000888

DOI: 10.1016/j.jfs.2023.101188

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