There is a puzzling divide within central banking. On one side are monetary economists who treat payment systems as mere ‘plumbing’ – important infrastructure, perhaps, but not central to serious theoretical inquiry. On the other side are payments practitioners who insist their world is strictly ‘operational,’ wearing their disinterest in theory almost as a badge of professional identity.
Over the years, the divide has become less pronounced, at least at the institutional frontier – some of the most intellectually integrated work in central banking happens precisely at this intersection. But as a tendency, and above all as a feature of how these fields are taught and organised, the separation remains in place. Graduate students can still earn advanced degrees in monetary economics without encountering a single lecture on settlement finality. Payments professionals can build entire careers without engaging seriously with the monetary theory that gives their work its systemic significance.
As a macroeconomist at the Banca d’Italia, I was reluctantly assigned to lead a division focused on international payments. What began as a detour from ‘real’ economics became a formative lesson: engaging in both payment operations and policy design revealed how inadequate macro-financial analysis is when payments are treated as an afterthought.
Payments at the core of monetary economics
Payments are the channels through which monetary policy impulses move. The speed with which central bank reserves circulate among banks, the ease with which liquidity is redistributed across the economy and the degree to which settlement frictions delay or block flows all shape how quickly policy actions reach households and firms.
Settlement rules discipline the process through which bank-created money becomes generally useable money. Bank deposits are created on bank balance sheets, but they function as money only if they can be transferred, accepted and settled with finality. Thus, settlement in central bank money is not an afterthought: it is what anchors the convertibility and credibility of commercial bank money.
The volume and velocity of reserves needed to support interbank settlement also affect the reserve intensity and liquidity cost of deposit creation and hence the economics of bank money issuance. Innovations in payment instruments – cryptocurrencies, stablecoins, tokenised assets — may reshape traditional channels of money creation with far-reaching consequences for monetary policy effectiveness and financial stability.
These are not operational footnotes. They belong to the theoretical architecture of money every bit as much as interest rates, inflation dynamics or exchange rates. To leave them out is not a simplifying assumption – it is a gap in the analysis.
The point becomes visible whenever liquidity stress appears. A payment delay in one institution can become a liquidity shortfall in another; a settlement queue can turn an otherwise solvent balance sheet into an intraday funding problem; and the design of netting, collateral, overdraft and finality arrangements can determine whether stress is absorbed locally or transmitted systemically. These are precisely the mechanisms through which payment design becomes macro-financial structure.
Theory at the core of payments
If monetary economists need to take payments seriously, practitioners must do the same with theory. Theory explains why liquidity shortages can cascade into crises, why settlement rules redefine the boundary between central bank money and bank money, and why seigniorage shifts when reserve usage changes. It reveals how today’s design decisions condition tomorrow’s vulnerabilities.
Theory also provides design principles: why gross settlement creates different incentives from netting, and why broadening access to central bank money reshapes the competitive landscape for banks and non-banks alike. These are not technical choices to be resolved by engineers; they are institutional decisions with macroeconomic consequences.
Where the divide is most costly is not in central banks, where the best research departments have long bridged it, but in universities and the broader professional culture they reproduce. Economics programmes continue to model money as if it flows frictionlessly. Payment system economics remains absent from most curricula.
Rising stakes
Discussions of monetary transmission rarely ask how settlement infrastructure might speed, slow or distort the process. And when crises occur, the connections that seemed obvious in retrospect were invisible in the models that were supposed to anticipate them.
Several converging developments make this divide harder to sustain. Digital innovation is erasing the boundary between money and payments. Stablecoins, tokenised deposits and central bank digital currencies are simultaneously new instruments of value and new payment infrastructures – their design cannot be evaluated through a purely monetary lens or a purely operational one.
Liquidity has become systemic in new ways. In a world of real-time gross settlement and instant payments, frictions that once absorbed shocks now propagate them. Artificial intelligence intensifies this: as AI-driven systems automate liquidity management and payment routing, decision cycles compress and design flaws can propagate faster and more widely than in the past. Beyond finance lies geopolitics: cross-border payment arrangements and the contest to build multi-currency platforms have become matters of monetary sovereignty.
The direction of travel is encouraging. Suomen Pankki, Finland’s central bank, has long developed simulators to model settlement dynamics. Within the Federal Reserve System, regional banks including New York, Chicago and Atlanta have built research capacity to keep operational and policy questions in dialogue. The Bank of England has woven payments into its core research agenda. The European Central Bank has embedded payments into its work on transmission and the digital euro.
The Bank of International Settlements has elevated these issues globally, framing tokenisation and next-generation settlement as having profound implications for monetary policy and financial stability. These examples reflect a recognition, spreading across the central banking community, that payments and monetary economics must be understood together.
What still needs to change
The task is to extend that recognition into the intellectual mainstream. Education is the most important lever. Some universities have begun incorporating payments into fintech programmes – Kennesaw State University in the US and Vrije Universiteit Amsterdam have built dedicated payment economics programmes; the University of Coimbra is preparing to go further, launching a dedicated master’s programme treating payment system economics as a core field of study. This ambition should become the norm. No economist who aspires to understand money should graduate without understanding how it actually moves.
Research must also become more collaborative – integrated teams building models that capture both macro and micro realities. AI- and data-driven oversight offer powerful tools for exactly this kind of work, but they are only as good as the conceptual framework behind them. And the cultural shift may matter most of all: the habit of mutual dismissal needs to give way to intellectual respect.
To study monetary policy without studying payments is like studying medicine without studying blood circulation: you may map the organs, but you will not understand life. To manage payment systems without theory is like designing circulation without knowing anatomy: you may keep the body functioning, but you will not understand its health.
The success of CBDCs depends on how well they function as a means of payment. Stablecoins and tokenised assets will transform payment flows in ways that redefine the underpinnings of monetary control. And multi-CBDC arrangements and new forms of cross-border interoperability will make unmistakably clear that payment design is monetary design.
Macro-financial economists who treat this as someone else’s problem risk being blindsided. Those who embrace the integration – in their research, their hiring and their relationships with universities – will be far better equipped for the challenges ahead.
Biagio Bossone is an adviser to international financial institutions and national central banks.
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