Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297328 
Year of Publication: 
2024
Series/Report no.: 
ECB Working Paper No. 2888
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper shows the existence of a central bank trilemma. When a central bank is involved in financial intermediation, either directly through a central bank digital currency (CBDC) or indirectly through other policy instruments, it can only achieve at most two of three objectives: a socially efficient allocation, financial stability (i.e., absence of runs), and price stability. In particular, a commitment to price stability can cause a run on the central bank. Implementation of the socially optimal allocation requires a commitment to inflation. We illustrate this idea through a nominal version of the Diamond and Dybvig (1983) model. Our perspective may be particularly appropriate when CBDCs are introduced on a wide scale.
Subjects: 
CBDC
currency crises
monetary policy
bank runs
spending runs
financial intermediation
central bank digital currency
inflation targeting
JEL: 
E58
G21
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-6368-8
Document Type: 
Working Paper

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