IDEAS home Printed from https://ideas.repec.org/p/bok/wpaper/1906.html
   My bibliography  Save this paper

Central Bank Digital Currency and Financial Stability

Author

Listed:
  • Young Sik Kim

    () (Department of Economics, Seoul National University)

  • Ohik Kwon

    () (Economic Research Institute, Bank of Korea)

Abstract

We examine the implications of central bank digital currency (CBDC) for financial stability using a monetary general equilibrium model in which (i) banks provide liquidity in the form of fiat currency, and (ii) commercial bank deposits compete with the central bank deposits in CBDC account. CBDC is a national currency-denominated, interest-bearing and account-based claim on the central bank. People have access to CBDC via direct deposit at the central bank. Claims on specific agents cannot be traded across locations due to limited communication and hence in the event of relocation an agent needs to withdraw deposits in the form of universally verified paper currency. Claims on interest-bearing CBDC is not subject to limited communication problem in the sense that it is also universally verified across locations as an account-based legal tender. The introduction of deposits in CBDC account essentially decreases supply of private credit by commercial banks, which raises the nominal interest rate and hence lowers a commercial bank's reserve-deposit ratio. This has negative effects on financial stability by increasing the likelihood of bank panic in which commercial banks are short of cash reserves to pay out to depositors. However, once the central bank can lend all the deposits in CBDC account to commercial banks, an increase in the quantity of CBDC which does not require reserve holdings can enhance financial stability by essentially increasing supply of private credit and hence lowering nominal interest rate.

Suggested Citation

  • Young Sik Kim & Ohik Kwon, 2019. "Central Bank Digital Currency and Financial Stability," Working Papers 2019-6, Economic Research Institute, Bank of Korea.
  • Handle: RePEc:bok:wpaper:1906
    as

    Download full text from publisher

    File URL: http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2019-6.pdf
    File Function: Working Paper, 2019
    Download Restriction: no

    References listed on IDEAS

    as
    1. Hyeongwoo Kim & Hyun Hak Kim & Wen Shi, 2015. "Forecasting Financial Stress Indices in Korea: A Factor Model Approach," Working Papers 2015-30, Economic Research Institute, Bank of Korea.
    2. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-971, December.
    3. Hyunju Kang & Bok-Keun Yu & Jongmin Yu, 2016. "Global Liquidity and Commodity Prices," Review of International Economics, Wiley Blackwell, vol. 24(1), pages 20-36, February.
    4. Jieun Lee & Jung-Min Kim & Jong Kook Shin, 2016. "US Interest Rate Policy Spillover and International Capital Flow: Evidence from Korea," Working Papers 2016-21, Economic Research Institute, Bank of Korea.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    banking; central bank; digital currency; liquidity;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:bok:wpaper:1906. 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: (Economic Research Institute). General contact details of provider: http://edirc.repec.org/data/imbokkr.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.