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.