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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, 2021. "Central Bank Digital Currency: Central Banking For All?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 225-242, July.
    • Handle: RePEc:red:issued:20-15
    DOI: 10.1016/j.red.2020.12.004
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    References listed on IDEAS

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    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

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