Central bank digital currency: When price and bank stability (Don’t) collide
Year: 2026
Type: article
Abstract: In a recent influential paper, Schilling et al. (2024) caution that the introduction of a central bank digital currency gives rise to a central bank trilemma in a nominal version of the quintessential Diamond and Dybvig (1983) model of bank-runs. Specifically, the central bank can achieve at most two out of three policy objectives: attaining the socially efficient allocation, financial stability, and price stability. We show that the central bank can employ a natural policy to evade their concerns. In particular, the central bank can create debt, backed by assets, to provide to patient runners. Giving patient households the option to save, rather than spend, with a safe asset solves the inflationary pressures of a run. The key mechanism is thus liability composition: accommodating safe‑asset demand without monetizing goods‑market demand.
Authors: Daniel Bird, David Weiss
Institution: Tel Aviv University
Language: English
Topic: Economic theories and models
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,270
OpenAlex ID: W7123914947