Central Bank Digital Currency: When Price and Bank Stability Collide
An account based central bank digital currency has the potential to replace demand deposits in private banks. In that case, the central bank invests in the real economy and takes over the role of maturity transformation to allow risk sharing among depositors. Her function as intermediary exposes the CB to demand liquidity or 'spending' shocks by her depositors. Since demand deposit contracts are nominal, high aggregate spending not necessarily demands excessive liquidation of real investment by the central bank. A run on a central bank can, therefore, manifest itself either as a standard run characterized by excessive real asset liquidation (rationing) or as a run on the price level where a small supply of real goods meets a high demand. The central bank thus trades off price stability against the excessive liquidation of real goods.