Working Paper: NBER ID: w28237
Authors: Linda 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; Banking Stability; Price Stability
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) | banking stability (F65) |
| introduction of a CBDC (E42) | price stability (E31) |
| central bank can achieve at most two of efficiency, financial stability, and price stability (E61) | CBDC trilemma (E42) |
| nominal contracts (K12) | prevention of bank runs (E44) |
| price stability may require sacrificing financial stability (E44) | implications of CBDC (E42) |
| central bank's ability to control the price level (E58) | banking stability (F65) |