Wednesday 21 October 2020
- Speaker: Dr Linda Schilling, Ecole Polytechnique
- Time: 2.45pm to 3.45pm
Title: Central Bank Digital Currency: When price and bank stability collide (joint with: Jesus Fernandez-Villaverde, Daniel Sanches and Harald Uhlig)
Abstract: An account-based central bank digital currency or CBDC may provide to be an attractive alternative to traditional demand-deposits in private banks. With that, the central bank needs to confront its role in the classic banking issues of financial intermediation, maturity transformation and demand-liquidity or 'spending' shocks by its private customers.
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 a CBDC Trilemma: of the three goals efficiency, financial stability (i.e. absence of runs) and price stability, the central bank can achieve at most two. We discuss how the analysis applies to a token-based CBDC, a hybrid CBDC and physical cash as well, with appropriate caveats.