IDEAS home Printed from https://ideas.repec.org/a/red/issued/20-15.html
   My bibliography  Save this article

Central Bank Digital Currency: Central Banking For All?

Author

Listed:
  • Jesus Fernandez-Villaverde

    (University of Pennsylvania)

  • Daniel Sanches

    (Federal Reserve Bank of Philadelphia)

  • Linda Schilling

    (Ecole Polytechnique)

  • Harald Uhlig

    (University of Chicago)

Abstract

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. Consumers 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 endanger maturity transformation. (Copyright: Elsevier)

Suggested Citation

  • Jesus Fernandez-Villaverde & Daniel Sanches & Linda Schilling & Harald Uhlig, . "Central Bank Digital Currency: Central Banking For All?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  • Handle: RePEc:red:issued:20-15
    DOI: 10.1016/j.red.2020.12.004
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1016/j.red.2020.12.004
    Download Restriction: Access to full texts is restricted to ScienceDirect subscribers and institutional members. See http://www.sciencedirect.com/ for details.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jesús Fernández-Villaverde & Luis Garicano & Tano Santos, 2013. "Political Credit Cycles: The Case of the Eurozone," Journal of Economic Perspectives, American Economic Association, vol. 27(3), pages 145-166, Summer.
    2. Jonathan Chiu & Mohammad Davoodalhosseini & Janet Hua Jiang & Yu Zhu, 2019. "Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment," Staff Working Papers 19-20, Bank of Canada.
    3. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
    4. Kenneth Rogoff, 2015. "Costs and Benefits to Phasing out Paper Currency," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 445-456.
    5. Linda Schilling & Jesús Fernández-Villaverde & Harald Uhlig, 2020. "Central Bank Digital Currency: When Price and Bank Stability Collide," Working Papers 2020-180, Becker Friedman Institute for Research In Economics.
    6. Huberto M. Ennis & Todd Keister, 2009. "Bank Runs and Institutions: The Perils of Intervention," American Economic Review, American Economic Association, vol. 99(4), pages 1588-1607, September.
    7. Dirk Niepelt, 2020. "Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics," CESifo Working Paper Series 8712, CESifo.
    8. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    9. Brunnermeier, Markus K. & Niepelt, Dirk, 2019. "On the equivalence of private and public money," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 27-41.
    10. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
    11. Itay Goldstein & Ady Pauzner, 2005. "Demand–Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, June.
    12. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991. "Investor Sentiment and the Closed-End Fund Puzzle," Journal of Finance, American Finance Association, vol. 46(1), pages 75-109, March.
    13. von Thadden, Ernst-Ludwig, 1998. "Intermediated versus Direct Investment: Optimal Liquidity Provision and Dynamic Incentive Compatibility," Journal of Financial Intermediation, Elsevier, vol. 7(2), pages 177-197, April.
    14. David Andolfatto, 2018. "Assessing the Impact of Central Bank Digital Currency on Private Banks," Working Papers 2018-026, Federal Reserve Bank of St. Louis, revised 22 Apr 2020.
    15. Beniak, Patrycja, 2019. "Central bank digital currency and monetary policy: a literature review," MPRA Paper 96663, University Library of Munich, Germany.
    16. Michael D. Bordo & Andrew T. Levin, 2017. "Central Bank Digital Currency and the Future of Monetary Policy," NBER Working Papers 23711, National Bureau of Economic Research, Inc.
    17. Eric Monnet, 2018. "Controlling Credit. Central Banking and the Planned Economy in Postwar France, 1948–1973," PSE-Ecole d'économie de Paris (Postprint) halshs-02921743, HAL.
    18. Amber Wadsworth, 2018. "The pros and cons of issuing a central bank digital currency," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 81, pages 1-21, June.
    19. Milton Friedman & Anna J. Schwartz, 1987. "Has Government Any Role in Money?," NBER Chapters, in: Money in Historical Perspective, pages 289-314, National Bureau of Economic Research, Inc.
    20. Linda Schilling, 2018. "Optimal forbearance of bank resolution," 2018 Meeting Papers 36, Society for Economic Dynamics.
    21. Aleksander Berentsen & Fabian Schar, 2018. "The Case for Central Bank Electronic Money and the Non-case for Central Bank Cryptocurrencies," Review, Federal Reserve Bank of St. Louis, vol. 100(2), pages 97-106.
    22. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-761, July.
    23. Amil Dasgupta, 2004. "Financial Contagion Through Capital Connections: A Model of the Origin and Spread of Bank Panics," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1049-1084, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jon Frost & Hyun Song Shin & Peter Wierts, 2020. "An early stablecoin? The Bank of Amsterdam and the governance of money," DNB Working Papers 696, Netherlands Central Bank, Research Department.
    2. Fernández-Villaverde, Jesús & Schilling, Linda Marlene & Uhlig, Harald, 2020. "Central Bank Digital Currency: When Price and Bank Stability Collide," CEPR Discussion Papers 15555, C.E.P.R. Discussion Papers.
    3. Eun Young Oh & Shuonan Zhang, 2020. "Central bank digital currency and informal economy," Working Papers in Economics & Finance 2020-11, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.
    4. Franklin Allen & Julapa Jagtiani, 2020. "A Survey of Fintech Research and Policy Discussion," Working Papers 20-21, Federal Reserve Bank of Philadelphia.
    5. Richard K. Lyons & Ganesh Viswanath-Natraj, 2020. "What Keeps Stablecoins Stable?," NBER Working Papers 27136, National Bureau of Economic Research, Inc.
    6. Jesus Fernandez-Villaverde, 2020. "Simple Rules for a Complex World with Arti?cial Intelligence," PIER Working Paper Archive 20-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    7. Jia, Pengfei, 2020. "Negative Interest Rates on Central Bank Digital Currency," MPRA Paper 103828, University Library of Munich, Germany.
    8. Grym, Aleksi, 2020. "Lessons learned from the world's first CBDC," BoF Economics Review 8/2020, Bank of Finland.
    9. Ferrari, Massimo & Mehl, Arnaud & Stracca, Livio, 2020. "Central bank digital currency in an open economy," CEPR Discussion Papers 15335, C.E.P.R. Discussion Papers.
    10. Daniel R. Sanches, 2020. "Central Bank Digital Currency: Is It a Good Idea?," Economic Insights, Federal Reserve Bank of Philadelphia, vol. 5(2), pages 9-15, June.
    11. Jonathan Chiu & Mohammad Davoodalhosseini & Janet Hua Jiang & Yu Zhu, 2020. "Safe Payments," Staff Working Papers 20-53, Bank of Canada.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Assaf Razin & Itay Goldstein, 2012. "Review Of Theories of Financial Crises," 2012 Meeting Papers 214, Society for Economic Dynamics.
    2. Goldstein, Itay & Razin, Assaf, 2015. "Three Branches of Theories of Financial Crises," Foundations and Trends(R) in Finance, now publishers, vol. 10(2), pages 113-180, 30.
    3. Linda Schilling, 2018. "Optimal forbearance of bank resolution," 2018 Meeting Papers 36, Society for Economic Dynamics.
    4. Ennis, Huberto M. & Keister, Todd, 2010. "Banking panics and policy responses," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 404-419, May.
    5. Dwyer Jr., Gerald P. & Samartín, Margarita, 2009. "Why do banks promise to pay par on demand?," Journal of Financial Stability, Elsevier, vol. 5(2), pages 147-169, June.
    6. Moheeput, Ashwin, 2008. "Financial Fragility, Systemic Risks and Informational Spillovers : Modelling Banking Contagion as State-Contingent Change in Cross-Bank Correlation," The Warwick Economics Research Paper Series (TWERPS) 853, University of Warwick, Department of Economics.
    7. Beck, Thorsten & Carletti, Elena & Goldstein, Itay, 2016. "Financial Regulation in Europe: Foundations and Challenges," CEPR Discussion Papers 11147, C.E.P.R. Discussion Papers.
    8. Allen, Franklin & Carletti, Elena & Goldstein, Itay & Leonello, Agnese, 2018. "Government guarantees and financial stability," Journal of Economic Theory, Elsevier, vol. 177(C), pages 518-557.
    9. Fecht, Falko & Wedow, Michael, 2014. "The dark and the bright side of liquidity risks: Evidence from open-end real estate funds in Germany," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 376-399.
    10. Jia, Pengfei, 2020. "Negative Interest Rates on Central Bank Digital Currency," MPRA Paper 103828, University Library of Munich, Germany.
    11. Manz, Michael, 2010. "Information-based contagion and the implications for financial fragility," European Economic Review, Elsevier, vol. 54(7), pages 900-910, October.
    12. Jonathan Chiu & Mohammad Davoodalhosseini & Janet Hua Jiang & Yu Zhu, 2020. "Safe Payments," Staff Working Papers 20-53, Bank of Canada.
    13. Chen, Qi & Goldstein, Itay & Jiang, Wei, 2010. "Payoff complementarities and financial fragility: Evidence from mutual fund outflows," Journal of Financial Economics, Elsevier, vol. 97(2), pages 239-262, August.
    14. Todd Keister, 2016. "Bailouts and Financial Fragility," Review of Economic Studies, Oxford University Press, vol. 83(2), pages 704-736.
    15. Toni Ahnert, 2016. "Rollover Risk, Liquidity and Macroprudential Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(8), pages 1753-1785, December.
    16. Eisenbach, Thomas M., 2017. "Rollover risk as market discipline: A two-sided inefficiency," Journal of Financial Economics, Elsevier, vol. 126(2), pages 252-269.
    17. Xavier Vives, 2011. "Competition and Stability in Banking," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.),Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 12, pages 455-502, Central Bank of Chile.
    18. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
    19. Huberto M. Ennis & Todd Keister, 2009. "Bank Runs and Institutions: The Perils of Intervention," American Economic Review, American Economic Association, vol. 99(4), pages 1588-1607, September.
    20. Naqvi, Hassan, 2015. "Banking crises and the lender of last resort: How crucial is the role of information?," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 20-29.

    More about this item

    Keywords

    Central bank digital currency; Central banking; Intermediation; Maturity transformation; Bank runs; Lender of last resort;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:issued:20-15. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.