Central Bank Digital Currency: When Price and Bank Stability Collide

24 Pages Posted: 15 Jun 2020

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

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

Daniel R. Sanches

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Linda Schilling

Ecole Polytechnique- CREST

Harald Uhlig

University of Chicago - Department of Economics

Date Written: May 20, 2020

Abstract

An account-based central bank digital currency has the potential to replace demand-deposits in private banks. In that case, the central bank invests in the real economy and takes over the role of maturity transformation to allow risk-sharing among depositors. Her function as intermediary exposes the CB to demand-liquidity or 'spending' shocks by her depositors. Since demand-deposit contracts are nominal, high aggregate spending not necessarily demands excessive liquidation of real investment by the central bank. A run on a central bank can, therefore, manifest itself either as a standard run characterized by excessive real asset liquidation (rationing) or as a run on the price level where a small supply of real goods meets a high demand. The central bank thus trades off price stability against the excessive liquidation of real goods.

Keywords: Central banking, bank runs, intermediation

JEL Classification: E58, G21

Suggested Citation

Fernández-Villaverde, Jesús and Sanches, Daniel R. and Schilling, Linda 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

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics ( email )

3718 Locust Walk
160 McNeil Building
Philadelphia, PA 19104
United States
215-898-1504 (Phone)
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Daniel R. Sanches

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Linda Schilling (Contact Author)

Ecole Polytechnique- CREST ( email )

5 Avenue Henry Le Chatelier
Palaiseau, 91120
France

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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