IDEAS home Printed from https://ideas.repec.org/p/fip/fedpwp/88105.html
   My bibliography  Save this paper

Central Bank Digital Currency: Central Banking for All?

Author

Listed:
  • Jesus Fernandez-Villaverde
  • Daniel R. Sanches
  • Linda Schilling
  • Harald F. Uhlig

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 interme-diaries 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. Dur-ing 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. Depositors 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.

Suggested Citation

  • Jesus Fernandez-Villaverde & Daniel R. Sanches & Linda Schilling & Harald F. Uhlig, 2020. "Central Bank Digital Currency: Central Banking for All?," Working Papers 20-19, Federal Reserve Bank of Philadelphia, revised 01 Jun 2020.
  • Handle: RePEc:fip:fedpwp:88105
    DOI: 10.21799/frbp.wp.2020.19
    as

    Download full text from publisher

    File URL: https://philadelphiafed.org/-/media/research-and-data/publications/working-papers/2020/wp20-19.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kenneth Rogoff, 2015. "Costs and Benefits to Phasing out Paper Currency," NBER Macroeconomics Annual, University of Chicago Press, vol. 29(1), pages 445-456.
    2. 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.
    3. 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.
    4. 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. 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.
    2. Franklin Allen & Xian Gu & Julapa Jagtiani, 2020. "A Survey of Fintech Research and Policy Discussion," Working Papers 20-21, Federal Reserve Bank of Philadelphia, revised 28 May 2020.
    3. 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.
    4. 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.

    More about this item

    Keywords

    lender of last resort.; maturity transformation; central bank digital currency; bank runs; intermediation; central banking;

    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

    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:fip:fedpwp:88105. 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: (). General contact details of provider: http://edirc.repec.org/data/frbphus.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.