Central Bank Digital Currency: When Price and Bank Stability Collide

48 Pages Posted: 28 Dec 2020

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: 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.

JEL Classification: E580, G210

Suggested Citation

Schilling, Linda and Fernández-Villaverde, Jesús and Uhlig, Harald, Central Bank Digital Currency: When Price and Bank Stability Collide (2020). CESifo Working Paper No. 8773, Available at SSRN: https://ssrn.com/abstract=3751864 or http://dx.doi.org/10.2139/ssrn.3751864

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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National Bureau of Economic Research (NBER)

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Harald Uhlig

University of Chicago - Department of Economics ( email )

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