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Central bank digital currencies and financial stability in a modern monetary system

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  • Tercero-Lucas, David

Abstract

The aim of this study is to disentangle the effects of introducing an interest-bearing central bank digital currency (CBDC) for financial stability using a Diamond and Dybvig (1983) model in which (i) both CBDC and private bank deposits can be used in exchange and (ii) liquidity is created endogenously. Agents have direct access to a CBDC, which is a claim on the central bank. They use both sight deposits and CBDC to buy goods and commercial banks borrow reserves to cover liquidity needs. The introduction of an interest-bearing CBDC has direct implications for the sight deposit rate and the loan rate of banks. Besides, if the central bank aims to have a positive net worth and the absence of bank runs, a high demand for a CBDC is a necessary condition to achieve both objectives. If this is not the case, financial stability will be endangered.

Suggested Citation

  • Tercero-Lucas, David, 2023. "Central bank digital currencies and financial stability in a modern monetary system," Journal of Financial Stability, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:finsta:v:69:y:2023:i:c:s1572308923000888
    DOI: 10.1016/j.jfs.2023.101188
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    More about this item

    Keywords

    CBDC; Banking sector; Financial stability; Bank runs;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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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