Working Paper: CEPR ID: DP15521
Authors: Michael Kumhof; Jason Allen; Will Bateman; Rosa M. Lastra; Simon Gleeson; Saule Omarova
Abstract: Based on legal arguments, we advocate a conceptual and normative shift in our understanding of the economic character of central bank money (CBM). The widespread treatment of CBM as a central bank liability goes back to the gold standard, and uses analogies with commercial bank balance sheets. However, CBM is sui generis and legally not comparable to commercial bank money. Furthermore, in modern economies, CBM holders cannot demand repayment of CBM in anything other than CBM. CBM is not an asset of central banks either, and it is not central bank shareholder equity because it does not confer the same ownership rights as regular shareholder equity. Based on comparisons across a number of legal characteristics of financial instruments, we suggest that an appropriate characterization of CBM is as ‘social equity’ that confers rights of participation in the economy’s payment system and thereby its economy. This interpretation is important for macroeconomic policy in light of quantitative easing and potential future issuance of central bank digital currency (CBDC). It suggests that in robust economies with credible monetary institutions, and where demand for CBM is sufficiently and sustainably high, large-scale issuance such as under CBDC is not inflationary, and it does not weaken public sector finances.
Keywords: central bank money; currency; central bank reserves; central bank digital currency; quantitative easing; central bank balance sheet; liabilities; assets; equity; government debt
JEL Codes: E41; E42; E44; E51; E52; E58; G21; H61; H63; K0; K11; K12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CBM should not be classified as a liability of the central bank (E58) | No legal obligation for the central bank to repay CBM holders in anything other than CBM itself (E42) |
| Treating CBM as a liability creates a misleading appearance of fragility in central bank balance sheets (E58) | Large issuances of CBM do not inherently lead to financial instability (E58) |
| Large issuances of CBM do not inherently lead to financial instability (E58) | Such issuances can be beneficial, as they do not weaken public sector finances (H74) |
| CBM should be viewed as a form of social equity (H43) | Conferring rights of participation in the economy's payment system (E42) |
| CBM should be viewed as a form of social equity (H43) | Implications for macroeconomic policy, particularly regarding quantitative easing and the issuance of central bank digital currency (CBDC) (E59) |