Working Paper: CEPR ID: DP15555
Authors: Linda Marlene Schilling; Jess Fernández-Villaverde; Harald Uhlig
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.
Keywords: central bank digital currency; monetary policy; bank runs; financial intermediation; inflation targeting; cbdc trilemma
JEL Codes: E58; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of a CBDC (E42) | attractive alternative to traditional demand deposits (E41) |
| central bank's role as a financial intermediary (E58) | mitigate classic banking issues (G21) |
| central bank can meet its nominal obligations (E58) | runs could occur due to excessive real asset liquidation or failure to maintain price stability (E44) |
| CBDC trilemma (E42) | central bank can only achieve at most two of the three goals (E61) |
| central bank implements socially optimal allocations (E52) | sacrifice price stability to deter runs (E44) |
| central bank can control the price level (E58) | potential for runs exists if the liquidation policy is not effectively managed (G33) |