Central Bank Digital Currency: Central Banking For All?

36 Pages Posted: 27 Jan 2020 Last revised: 28 Dec 2020

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Daniel R. Sanches

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Linda Schilling

Washington University in Saint Louis, John M. Olin Business School

Harald Uhlig

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 15, 2020

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. 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 endangered maturity transformation.

Keywords: central bank digital currency, central banking, intermediation, maturity transformation, bank runs, lender of last resort

JEL Classification: E58, G21

Suggested Citation

Fernández-Villaverde, Jesús and Sanches, Daniel R. and Schilling, Linda and Uhlig, Harald, Central Bank Digital Currency: Central Banking For All? (January 15, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-04, Available at SSRN: https://ssrn.com/abstract=3525018 or http://dx.doi.org/10.2139/ssrn.3525018

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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Daniel R. Sanches

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

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Linda Schilling

Washington University in Saint Louis, John M. Olin Business School ( email )

Harald Uhlig

University of Chicago - Department of Economics ( email )

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Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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