CBDC, Flight-to-Quality, and Bank-Runs in an Agent-Based Model (arXiv)
This paper analyzes the impact of introducing a Central Bank Digital Currency (CBDC) on financial stability and welfare using a macroeconomic agent-based model incorporating firms, banks, and households. Households can switch their funds from bank deposits to CBDC based on perceived bank risk, which amplifies the risk of bank runs and financial instability, especially when there is no cap on CBDC holdings. The model shows that while CBDC introduction has limited effects on overall macroeconomic variables like GDP and unemployment, it leads to slightly higher loan interest rates and reduced credit to firms, with wealth increasingly redistributed from banks and firms to households. Unconstrained conversion of deposits to CBDC significantly raises bank default rates and economic volatility, whereas imposing limits (e.g., a cap at 30–40% of deposits and deposit insurance) mitigates these negative effects and can improve welfare. The research concludes that fears over financial disintermediation are mostly exaggerated—well-designed holding limits keep the risks low and offer resilience, but allowing large-scale conversion to CBDC could harm both stability and welfare. [Source: arXiv]
