Central Bank Digital Currency: When Price and Bank Stability Collide

48 Pages Posted: 15 Jun 2020 Last revised: 23 Nov 2021

See all articles by Linda Schilling

Linda Schilling

Washington University in Saint Louis, John M. Olin Business School

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 5 versions of this paper

Date Written: May 20, 2020

Abstract

A central bank digital currency, or CBDC, may provide an attractive alternative to traditional demand deposits held in private banks. When offering CBDC accounts, the central bank needs to confront classic issues of banking: conducting maturity transformation while providing liquidity to private customers who suffer ``spending'' shocks. We analyze these issues in a nominal version of a Diamond and Dybvig (1983) model, with an additional and exogenous price stability objective for the central bank. While the central bank can always deliver on its nominal obligations, runs can nonetheless occur, manifesting themselves either as excessive real asset liquidation or as a failure to maintain price stability. We demonstrate an impossibility result that we call the CBDC trilemma: of the three goals of efficiency, financial stability (i.e., absence of runs), and price stability, the central bank can achieve at most two.

Keywords: Central banking, bank runs, intermediation

JEL Classification: E58, G21

Suggested Citation

Schilling, Linda and Fernández-Villaverde, Jesús and Uhlig, Harald, Central Bank Digital Currency: When Price and Bank Stability Collide (May 20, 2020). Available at SSRN: https://ssrn.com/abstract=3606226 or http://dx.doi.org/10.2139/ssrn.3606226

Linda Schilling (Contact Author)

Washington University in Saint Louis, John M. Olin Business School ( email )

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics ( email )

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Harald Uhlig

University of Chicago - Department of Economics ( email )

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