Central bank digital currency: when price and bank stability collide

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

No 2888, Working Paper Series from European Central Bank

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 at most two of three objectives: a socially eÿcient 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. JEL Classification: E58, G21

Keywords: bank runs; CBDC; central bank digital currency; currency crises; financial intermediation; inflation targeting; monetary policy; spending runs (search for similar items in EconPapers)
Date: 2024-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg, nep-mon and nep-pay
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Citations: View citations in EconPapers (4)

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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 (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)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20242888

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