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 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.
•We consider a nominal version of the Diamond and Dybvig (1983) model•We show the existence of a central bank trilemma.•A central bank can only achieve at most two of three objectives:•attain a socially efficient allocation, financial stability, and price stability.•A commitment to price stability can cause a run on the central bank.•Implementation of the socially optimal allocation requires a commitment to inflation.•Our perspective may be appropriate when CBDCs are introduced on a wide scale.
The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial intermediaries for deposits. Yet, since ...a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. During a panic, however, we show that the rigidity of the central bank's contract with the investment banks has the capacity to deter runs. Thus, the central bank is more stable than the commercial banking sector. Consumers internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector. This monopoly might endanger maturity transformation.
Past empirical research on monetary policy in open economies has found evidence of the ‘delayed overshooting puzzle’ and the ‘forward discount puzzle’. We revisit the effects of monetary policy on ...exchange rates by applying Uhlig's Uhlig, H., 2005a. What are the effects of monetary policy on output? Results from an agnostic identification procedure. Journal of Monetary Economics 52(2), 381–419. identification procedure that involves sign restrictions on the impulse responses of selected variables. In a first step, we leave the response of the exchange rate agnostically open and find sizeable evidence for both puzzles. In a second step, we additionally rule out the delayed overshooting by construction. Our results indicate that the forward discount puzzle is robust even without delayed overshooting.
The slow decline of East Germany Uhlig, Harald
Journal of Comparative Economics,
12/2008, Letnik:
36, Številka:
4
Journal Article
Recenzirano
Odprti dostop
Fifteen years after German reunification, the facts about slow regional convergence have born out the prediction of Barro Barro, Robert J., 1991. Eastern Germany's long haul. The Wall Street Journal, ...Dow Jones and Company, May 3, except that migration out of East Germany has not slowed down. I document that in particular the 18–29 year old are leaving East Germany, and that the emigration has accelerated in recent years. I document that low wages, high unemployment and increasing reliance on social security persist across wide regions of East Germany together with these migration patterns. To understand these patterns, I use an extension of the standard labor search model introduced in Uhlig Uhlig, Harald, 2006. Regional labor markets, network externalities and migration: The case of German reunification. American Economic Review, Papers and Proceedings 96 (2), 383–387; Uhlig, Harald, 2008. A labor-search model of regional unemployment and migration. Draft, University of Chicago by allowing for migration and network externalities. In that theory, two equilibria can result: one with a high networking rate, high average labor productivity, low unemployment and no emigration (“West Germany”) and one with a low networking rate, low average labor productivity, high unemployment and a constant rate of emigration (“East Germany”). The model does not imply any obviously sound policies to move from the weakly networked equilibrium to the highly networked equilibrium.
Journal of Comparative Economics
36 (4) (2008) 517–541.
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