CBDC’s design implications for financial stability
Year: 2025
Type: article
Abstract: This paper investigates the financial stability implications of introducing a central bank digital currency (CBDC) using an extension of the classical Diamond and Dybvig (1983) model. We analyze two key concerns associated with CBDCs: their potential to foster disintermediation of commercial banks and their impact on the likelihood and dynamics of bank runs. Our findings suggest that a simply designed CBDC — non-interest bearing, functioning as a digital equivalent of cash — does not inherently lead to disintermediation, as it primarily substitutes for physical cash in transactional use. Moreover, we show that a well-implemented Emergency Liquidity Assistance (ELA) policy, facilitated by CBDC transactions, can eliminate the equilibrium conditions for bank runs by providing timely and sufficient liquidity to illiquid banks without disrupting investments. Thus, a properly designed CBDC can enhance financial stability in a cashless economy while mitigating the risks of both “slow” and “fast” disintermediation.
Authors: Jorge Ponce, Santiago Taroco
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $1,700
OpenAlex ID: W4413655123