Central banks around the world are increasingly exploring central bank digital currencies (CBDCs). This paper investigates the possible impacts of cross-border CBDCs on capital flows and financial stability in a simple open economy extension of a classical model of bank runs, augmented with the presence of a credible foreign central bank, which issues an account-based interest bearing CBDC available to nonresidents. The paper finds that the presence of a foreign CBDC which acts as an international safe asset may increase the risk of financial disintermediation in the domestic banking sector, which can be accompanied by higher and more volatile capital flows.
Wouter Bossu, Mr. Masaru Itatani, and Arthur D. P. Rossi
I. Introduction 1
1. In reaction to digital ledger, blockchain and other technological developments, as well as the possible issuance of private virtual currencies (“stablecoins”), the central banking community is actively considering the merits of issuing so-called “central bank digital currency” (“CBDC”). Many central banks have started in-depth discussions on the appropriateness and feasibility of issuing such currency. 2 A survey concludes that “at this stage, most central banks appear to have clarified the challenges of launching a CBDC, but they are