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Central bank digital currency and flight to safety

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  • Williamson, Stephen D.

Abstract

A model is developed with a novel approach to analyzing banking panics in general equilibrium. Banks may fail, and bank insolvency potentially drives banking panics in which there is payment disruption, in the absence of sequential service constraints. Policy intervention, including deposit insurance and emergency open market operations, is considered. Central bank digital currency tends to encourage banking panics, in part because panics are less disruptive with central bank digital currency than with physical currency. It may be optimal to live with banking panics, as eliminating them may be too costly.

Suggested Citation

  • Williamson, Stephen D., 2022. "Central bank digital currency and flight to safety," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
  • Handle: RePEc:eee:dyncon:v:142:y:2022:i:c:s0165188921000816
    DOI: 10.1016/j.jedc.2021.104146
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    References listed on IDEAS

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    Cited by:

    1. Keister, Todd & Monnet, Cyril, 2022. "Central bank digital currency: Stability and information," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    2. Jeremie Banet & Lucie Lebeau, 2022. "Central Bank Digital Currency: Financial Inclusion vs. Disintermediation," Working Papers 2218, Federal Reserve Bank of Dallas.

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    More about this item

    Keywords

    Digital currency; Monetary policy;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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