Working Paper: NBER ID: w26753
Authors: Jess Fernández-Villaverde; Daniel Sanches; Linda Schilling; Harald Uhlig
Abstract: The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial intermediaries for deposits. Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. During a panic, however, we show that the rigidity of the central bank's contract with the investment banks has the capacity to deter runs. Thus, the central bank is more stable than the commercial banking sector. Depositors internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector. This monopoly might endangered maturity transformation.
Keywords: central bank digital currency; financial intermediation; bank runs
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) | Central Bank competes with private financial intermediaries (E58) |
| Introduction of a CBDC (E42) | Attracts deposits away from commercial banks (G21) |
| Central Bank's rigidity (E58) | Deters runs during banking panic (E44) |
| CBDC stability (E42) | Depositor preference for CBDC (E41) |
| Monopoly power of Central Bank (E58) | Endangers maturity transformation (G33) |
| Impaired competition from commercial banks (G21) | Suboptimal outcomes of CBDC (F65) |