What Does Introducing CBDCs Imply for the Stability of Central Banks?

The ability of private citizens to execute electronic transactions using a Central Bank Digital Currency (CBDC), central bank money, introduces new monetary stability challenges. A paper by Harald Uhlig from the University of Chicago considers this1. The paper is highly theoretical but raises the sort of questions central banks have to get right in their planning for a CBDC.

Central banks can be subject to ‘spending runs’, which will matter when they issue widely used CBDCs. The challenge is how to balance three objectives – price stability, efficiency, and monetary trust. The paper argues that a central bank can only achieve, at most, two of these.

A bank run is when people take money out of their deposits in a commercial bank in cash. If people are concerned about the bank they turn deposits into cash, if concerned about the value of money, they will turn money into goods. In the latter case, the bank run is a spending run. Few debates have considered the impact of a spending run on CBDCs caused by a loss of faith in their store of value function.