A government-issued digital dollar could actually help stabilize a wobbly financial system, according to a new paper from the Office of Financial Research. By jesseahamilton
Tuesday. The findings may counter financial lobbyists hoping to steer the government away from such a currency.
The papers’ authors said a CBDC would give the government an early-warning system, acting like a canary in the coal mine that they can study for signs of distress. More flows into digital dollars would tell regulators that trouble could be brewing. The existence of a CBDC during normal times would also set up less incentive for depositors to run from a weak bank when a crisis erupts, they said, because it will have removed some of the benefits of “maturity transformation” in which banks gain from borrowing money on shorter terms than they lend it out at. So banks would be a bit more stable before the crisis happens, the OFR paper contends.
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