Central Bank Digital Currency: Central Banking for All?

RePEc Short ID: puh1
ORCID iD: 0000-0003-0918-032X

Fernández-Villaverde, Jesús; Sanches, Daniel R.; Uhlig, Harald

doi:10.21799/frbp.wp.2020.19

Working Paper

Central Bank Digital Currency: Central Banking for All?

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.

Keywords: central bank digital currency; central banking; intermediation; maturity transformation; bank runs; lenders of last resort;

JEL Classification: E58; G21;

https://doi.org/10.21799/frbp.wp.2020.19