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Central bank digital currency: when price and bank stability collide

Author

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  • Fernández-Villaverde, Jesús
  • Schilling, Linda
  • Uhlig, Harald
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. JEL Classification: E58, G21

Suggested Citation

  • Fernández-Villaverde, Jesús & Schilling, Linda & Uhlig, Harald, 2024. "Central bank digital currency: when price and bank stability collide," Working Paper Series 2888, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20242888
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    More about this item

    Keywords

    bank runs; CBDC; central bank digital currency; currency crises; financial intermediation; inflation targeting; monetary policy; spending runs;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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