Central Bank Digital Currency: When Price and Bank Stability Collide

49 Pages Posted: 23 Dec 2020

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

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

Linda Schilling

Washington University in Saint Louis, John M. Olin Business School

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 5 versions of this paper

Date Written: December 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: E58, G21

Suggested Citation

Fernández-Villaverde, Jesús and Schilling, Linda and Uhlig, Harald, Central Bank Digital Currency: When Price and Bank Stability Collide (December 2020). CEPR Discussion Paper No. DP15555, Available at SSRN: https://ssrn.com/abstract=3753955

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

3718 Locust Walk
160 McNeil Building
Philadelphia, PA 19104
United States
215-898-1504 (Phone)
215-573-2057 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Linda Schilling

Washington University in Saint Louis, John M. Olin Business School ( email )

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
366
PlumX Metrics