Central Bank Digital Currency, Flight-to-Quality, and Bank-Runs in an Agent-Based Model

2025-10-23

AI Summary

This study investigates the mechanisms through which central bank digital currency (CBDC) affects financial stability and social welfare. Using a dynamic, heterogeneous-agent macroeconomic model featuring households, banks, and firms—embedded within an agent-based modeling (ABM) framework with fully specified credit markets and interbank interactions—the paper simulates deposit flight to CBDC and its macroeconomic implications, particularly bank runs. Results show that unconstrained CBDC issuance exacerbates bank runs, undermines financial stability, and yields net negative welfare effects. In contrast, imposing individual CBDC holding limits significantly mitigates run risk, enhances aggregate welfare, and induces only modest increases in lending rates and mild credit contraction. The key contribution lies in the first systematic identification—within a microfounded ABM setting with realistic banking and credit frictions—of the endogenous run mechanism triggered by CBDC, and the demonstration that holding caps simultaneously improve both financial stability and welfare. This provides rigorous, microeconomically grounded policy guidance for CBDC design.

Technology Category

• Multiagent Systems: Mechanism Design
• Game Theory and Economic Paradigms: Mechanism Design
• Cognitive Modeling & Cognitive Systems: Social Cognition And Interaction

Application Category

• Economics, Online Markets and Human Computation: Sustainability of Web economics
• Security and Privacy: Large-scale security measurements
• Responsible Web: Human-perceived consequences of algorithmic deployment on the web

Abstract

We analyse financial stability and welfare impacts associated with the introduction of a Central Bank Digital Currency (CBDC) in a macroeconomic agent-based model. The model considers firms, banks, and households interacting on labour, goods, credit, and interbank markets. Households move their liquidity from deposits to CBDC based on the perceived riskiness of their banks. We find that the introduction of CBDC exacerbates bank-runs and may lead to financial instability phenomena. The effect can be changed by introducing a limit on CBDC holdings. The adoption of CBDC has little effect on macroeconomic variables but the interest rate on loans to firms goes up and credit goes down in a limited way. CBDC leads to a redistribution of wealth from firms and banks to households with a higher bank default rate. CBDC may have negative welfare effects, but a bound on holding enables a welfare improvement.

Problem

• Analyzing financial stability impacts of Central Bank Digital Currency introduction
• Examining how CBDC exacerbates bank-runs and creates financial instability
• Investigating welfare effects and redistribution of wealth from CBDC adoption

Innovation

• Agent-based model simulates CBDC impact
• Households shift deposits based on bank risk
• CBDC holdings limit mitigates financial instability