Central Bank Digital Currency: When Price and Bank Stability Collide
48 Pages Posted: 15 Jun 2020 Last revised: 6 Dec 2021
There are 6 versions of this paper
Central Bank Digital Currency: When Price and Bank Stability Collide
Central Bank Digital Currency: When Price and Bank Stability Collide
Central Bank Digital Currency: When Price and Bank Stability Collide
Central Bank Digital Currency: When Price and Bank Stability Collide
Central Bank Digital Currency: When Price and Bank Stability Collide
Central Bank Digital Currency: When Price and Bank Stability Collide
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: Suggested Citation