Central bank digital currency: Stability and information

Keister, Todd; Monnet, Cyril (2022). Central bank digital currency: Stability and information. Journal of economic dynamics & control, 142, p. 104501. Elsevier 10.1016/j.jedc.2022.104501

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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.

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