Central Bank Digital Currency: When Price and Bank Stability Collide

48 Pages Posted: 15 Jun 2020 Last revised: 6 Dec 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

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Date Written: May 20, 2020

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

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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