Central Banking in a Monetary Theory of Production: The Economics of Payment Finality from a Circular-Flow Perspective

Payment finality — that is, ‘the discharge of an obligation by a transfer of funds and a transfer of securities that have become irrevocable and unconditional’ (Committee on Payment and Settlement Systems, 2003a, p. 496) — is crucial for the orderly working of modern economic systems. As a matter of fact, monetary transactions are the backbone of production and exchange, national as well as international. Payments equivalent to a country’s annual GDP are presently made over a few working days within any national economy. The large volume and scope of payments at the time of writing imply that problems in their settlement could affect the financial sector and even the economy as a whole. Further, the implementation and transmission mechanism of a central bank’s monetary policy also depends on the smooth functioning of domestic payment systems, and hence the issue of payment finality is of both private and public concern.