Central Bank Digital Currency: When Price and Bank Stability Collide

By Linda Schilling, Jesús Fernández-Villaverde, Harald Uhlig. Social Science Research Network, 2020

116 citations recorded by the source corpus.

An account-based central bank digital currency has the potential to replace demand-deposits in private banks. In that case, the central bank invests in the real economy and takes over the role of maturity transformation to allow risk-sharing among depositors. Her function as intermediary exposes the CB to demand-liquidity or 'spending' shocks by her depositors. Since demand-deposit contracts are nominal, high aggregate spending not necessarily demands excessive liquidation of real investment by the central bank. A run on a central bank can, therefore, manifest itself either as a standard run characterized by excessive real asset liquidation (rationing) or as a run on the price level where a small supply of real goods meets a high demand. The central bank thus trades off price stability against the excessive liquidation of real goods.

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Citations in the corpus

Central bank digital currency: Central banking for all? (2020, background): “We pursue the implications of a CBDC in a nominal setting and its inter-relations with more traditional monetary policy in Schilling et al. (2020).”
Should Central Banks Issue Digital Currency? (2019, unknown): “23 See, for example, Williamson (2021) and Schilling et al. (2021)”