Research / BFI Working PaperDec 13, 2020

Central Bank Digital Currency: When Price and Bank Stability Collide

Linda Schilling, Jesús Fernández-Villaverde, Harald Uhlig

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 trans- formation 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.

More Research From These Scholars

BFI Working Paper Apr 9, 2018

Mortgage-Backed Securities and the Financial Crisis of 2008: a Post Mortem

Juan Ospina, Harald Uhlig
Topics:  Fiscal Studies, Monetary Policy
BFI Working Paper Nov 22, 2018

Money Markets, Collateral and Monetary Policy

Fiorella De Fiore, Marie Hoerova, Harald Uhlig
Topics:  Financial Markets, Monetary Policy, Fiscal Studies
BFI Working Paper Aug 1, 2009

How Far are We from the Slippery Slope? The Laffer Curve Revisited

Mathias Trabandt
Topics:  Fiscal Studies, Monetary Policy