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Central bank digital currency: Stability and information

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  • Keister, Todd
  • Monnet, Cyril
Abstract
We study how introducing a central bank digital currency (CBDC) would affect the stability of the banking system. We present a model that captures a concern commonly raised in policy discussions: the option to hold CBDC can increase the incentive for depositors to run on weak banks. Our model highlights two countervailing effects. First, banks do less maturity transformation when depositors have access to CBDC, which leaves them less exposed to runs. Second, monitoring the flow of funds into CBDC allows policymakers to identify and resolve weak banks sooner, which also decreases depositors’ incentive to run. Our results suggest that a well-designed CBDC may decrease rather than increase financial fragility.

Suggested Citation

  • Keister, Todd & Monnet, Cyril, 2022. "Central bank digital currency: Stability and information," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    • Handle: RePEc:eee:dyncon:v:142:y:2022:i:c:s0165188922002056
    DOI: 10.1016/j.jedc.2022.104501
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    More about this item

    Keywords

    CBDC; Digital currency; Financial stability; Bank runs;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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