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© 2022 International Monetary Fund WP/22/83
IMF Working Paper*
Strategy, Policy & Review Department
Cross-Border Central Bank Digital Currencies, Bank Runs and Capital Flows Volatility
Prepared by Adina Popescu
Authorized for distribution by Martin Čihák
May 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: 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.
| JEL Classification Numbers: | E50, E58, F50, G21 |
| Keywords: | Central bank digital currency, CBDC, capital flows, open-economy, financial stability |
| Author’s E-Mail Address: | Apopescu@imf.org |
| JEL Classification Numbers: | E50, E58, F50, G21 |
| Keywords: | Central bank digital currency, CBDC, capital flows, open-economy, financial stability |
| Author’s E-Mail Address: | Apopescu@imf.org |
Contents
1 Introduction
1.1 Theoretical Literature Review
1.2 How to Model a CBDC ? Motivations and Design Features
2 The Model
2.1 Consumers
2.2 Domestic Commercial Banks
2.3 A Foreign CBDC-Issuing Central Bank
2.4 The Consumer’s Problem
2.5 Equilibrium with No Runs
2.6 Domestic Commercial Bank Runs
2.7 Equilibrium with Runs in the Foreign CBDC
2.7.1 Possible Extensions
2.7.2 Discussion of Results
3 Policy Implications and Conclusion
3.1 Conclusions
4 Appendix
4.1 A. Characterization of the Commercial Bank Deposit Contract
4.2 B. Characterization of the Foreign Central Bank Safe Deposit Contract
4.2.1 Punishment for Early Withdrawals
4.2.2 Equal Treatment with Patient Depositors
The author would like to thank Itai Agur, Tohid Atashbar, Bas Bakker, Martin Čihák, Kenneth Kang, Jorge Ivan Canales Kriljenko, Marcello Miccolini, Inutu Lukonga, Hector Perez-Saiz, Silvia Sgherri, Fabián Valencia and Ryan Wu for the helpful suggestions and discussions.