Working Paper: CEPR ID: DP18222
Authors: Toni Ahnert; Peter Hoffmann; Agnese Leonello; Davide Porcellacchia
Abstract: We develop a model of financial intermediation with remunerated Central Bank Digital Currency (CBDC) as consumers’ alternative to bank deposits and an endogenous risk of bank runs. Echoing widespread concerns, higher CBDC remuneration raises bank fragility by increasing consumers’ withdrawal incentives. On the other hand, it also induces banks to offer more attractive deposit contracts in order to retain funding, thereby reducing fragility. This results in a U-shaped relationship between bank fragility and CBDC remuneration. We evaluate policy proposals aimed at mitigating the financial-stability risks of CBDC, such as holding limits and contingent CBDC remuneration.
Keywords: central bank digital currency; bank fragility; financial stability; cbdc remuneration
JEL Codes: D82; G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher CBDC remuneration (E42) | increase bank fragility (F65) |
| higher CBDC remuneration (E42) | offer more attractive deposit contracts (G21) |
| offer more attractive deposit contracts (G21) | reduce bank fragility (G28) |
| higher CBDC remuneration (E42) | U-shaped relationship with bank fragility (F65) |
| elasticity of failure threshold concerning bank deposit rate > 1 (G21) | indirect effect dominates (D91) |