A Central Bank Digital Currency in our Hierarchical Monetary System?
We use a simple general equilibrium framework to illustrate that while the introduction of an account-based, interest-bearing central bank digital currency leads to tighter competition among banks, it generates several risks: higher liquidity (and bank run) risk for banks, a shift of banks' default risk from depositors to the central bank and a viability risk for the entire banking system. Liquidity and solvency risks of banks can be avoided or absorbed by the central bank, e.g. by loosening collateral standards or accumulating central bank losses. These measures may, however, entail macroeconomic consequences such as inflation and distorted investment allocations. Stricter bank equity requirements or insurance schemes for bank liabilities against the central bank may be needed to mitigate such economy-wide effects.