Central Bank Digital Currency and Financial Stability

Toni Ahnert, Peter Hoffmann, Agnese Leonello and Davide Porcellacchia

No 18222, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a model of financial intermediation with remunerated Central Bank Digital Currency (CBDC) as consumers’ alternative to bank deposits and an endogenous risk of bank runs. Echoing widespread concerns, higher CBDC remuneration raises bank fragility by increasing consumers’ withdrawal incentives. On the other hand, it also induces banks to offer more attractive deposit contracts in order to retain funding, thereby reducing fragility. This results in a U-shaped relationship between bank fragility and CBDC remuneration. We evaluate policy proposals aimed at mitigating the financial-stability risks of CBDC, such as holding limits and contingent CBDC remuneration.

Keywords: Central bank digital currency; Bank fragility; Financial stability; Global games (search for similar items in EconPapers)
JEL-codes: D82 G01 G21 (search for similar items in EconPapers)
Date: 2023-06
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP18222 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Central Bank Digital Currency and financial stability (2023)
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:cpr:ceprdp:18222

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP18222
orders@cepr.org

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by (repec@cepr.org).