Central bank digital currency: Central banking for all?

By Jesús Fernández-Villaverde, Daniel R. Sanches, Linda Schilling, Harald Uhlig. Review of economic dynamics (Print), 2020

291 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Information Systems

View Paper: https://www.semanticscholar.org/paper/239c35fdb0ea3e2bd44317d4c466f64642f69866

Citations in the corpus

• Should Central Banks Issue Digital Currency? (2019, unknown): “In this way, the central bank could introduce a digital currency that is held in equilibrium without changing the equilibrium allocation of resources, in line with the Brunnermeier-Niepelt equivalence result.19 19 See also Niepelt (2020) and Fernández-Villaverde et al. (2021).”
• Rise of the Central Bank Digital Currencies: Drivers, Approaches and Technologies (2020, unknown): “Another area is the systemic implications of CBDCs and how to cope with them (Brunnermeier and Niepelt (2019), Fernández-Villaverde et al (2020), Kwon et al (2020), Carletti et al (2020)).”