Central Bank Money and Actual Performance

Central bank money refers to the liability of the balance sheets of central banks — namely, money created by a central bank to be used by fulfilling the four functions of money described earlier. Cash used to be the most important means of payment in the past. The amount of outstanding coins issued is much smaller than the amount of outstanding central bank notes in circulation due to the smaller units, so coins are used only for small purchases. Meanwhile, the development of the banking system and technological advances have given rise to interbank payments and settlement systems where commercial banks lend to each other. A central bank manages interbank payments and settlement systems through monitoring the movements of reserve deposit balances at the central bank. The amount of cash is issued based on the quantity demanded by the general public, which is associated with transaction demand (normally proxied with the nominal gross domestic product [GDP]) as well as the opportunity cost (normally a deposit rate paid by the commercial bank to the general public). Thus, a central bank supplies cash passively in response to changes in demand. A central bank provides commercial banks with cash by withdrawing the equivalent amount from their reserve deposit accounts; commercial banks then distribute the acquired cash to the general public on demand through windows of bank branches and/or ATMs. This is article is an excerpt taken from an original work of Dr. Sayuri Shirai which is published by Asian Development Bank Institute as a "Working Paper" (Series - No. 922 / February 2019). / The original work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 IGO License. Click here, to download the working paper. &nbsp