Central Bank Digital Currency: When Price and Bank Stability Collide
55 Pages Posted: 16 Jan 2024
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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: January, 2024
Abstract
This paper shows the existence of a central bank trilemma. When a central bank is involved in financial intermediation, either directly through a central bank digital currency (CBDC) or indirectly through other policy instruments, it can only achieve at most two of three objectives: a socially eÿcient allocation, financial stability (i.e., absence of runs), and price stability. In particular, a commitment to price stability can cause a run on the central bank. Implementation of the socially optimal allocation requires a commitment to inflation. We illustrate this idea through a nominal version of the Diamond and Dybvig (1983) model. Our perspective may be particularly appropriate when CBDCs are introduced on a wide scale.
Keywords: bank runs, CBDC, central bank digital currency, currency crises, financial intermediation, inflation targeting, monetary policy, spending runs
JEL Classification: E58, G21
Suggested Citation: Suggested Citation