Central Bank Digital Currency: Central Banking for All?

34 Pages Posted: 1 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: June, 2020

Abstract

The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial interme-diaries for deposits. Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. Dur-ing a panic, however, we show that the rigidity of the central bank’s contract with the investment banks has the capacity to deter runs. Thus, the central bank is more stable than the commercial banking sector. Depositors internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector. This monopoly might endanger maturity transformation.

Keywords: central bank digital currency, central banking, intermediation, maturity transformation, bank runs, lender of last resort.

JEL Classification: E58, G21

Suggested Citation

Fernández-Villaverde, Jesús and Sanches, Daniel R. and Schilling, Linda and Uhlig, Harald, Central Bank Digital Currency: Central Banking for All? (June, 2020). FRB of Philadelphia Working Paper No. 20-19, Available at SSRN: https://ssrn.com/abstract=3616340 or http://dx.doi.org/10.21799/frbp.wp.2020.19

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Daniel R. Sanches

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

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Linda Schilling

Ecole Polytechnique- CREST ( email )

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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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