Central Bank Digital Currency: When Price and Bank Stability Collide

Abstract

We build a stylized, nominal Diamond-and-Dybvig (1983) model, a consolidated central bank conducts maturity transformation, issuing on-demand, nominal liabilities in the form of an account-based central bank digital currency (CBDC) to citizens and investing the funds in a real asset.
We show, the central bank's classic role as the guardian of price stability is in fundamental conflict with its role as a financial intermediator. Implementation of the socially optimal allocation requires a commitment to inflation. Commitment to price stability jeopardizes the real return on currency, and causes runs. Central bank runs manifest themselves as a `run on the price level'.

Keywords: currency crises, monetary policy, bank runs, financial intermediation, central bank digital currency, inflation targeting

JEL Classification: E58, G21