Rethinking Central Bank Money

A two part IMF blog by Biagio Bossone and Massimo Costa seeks to reframe how central bank money, banknotes, reserves, and CBDCs are regarded, moving them from being seen as a debt to equity for the issuer and as custodial assets for the holders ¹.

They argue that how central bank money is treated comes from legacy conventions that are incorrect and are, now, causing problems.

A financial liability is a contractual obligation of the issuer to deliver an economic resource to the holder. But central bank reserves – the balances commercial banks hold in their accounts at the central bank – carry no such obligation. The reason that reserves are still classified as liabilities lies in historical inertia from the days of the gold and silver standards, when reserves were redeemable for metals or foreign currency.