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Efficient payments: How much do they cost for the Central Bank?

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  • Bouhdaoui, Y.
  • Bounie, D.

Abstract

Previous works related to optimal denominations for coins and banknotes consider that the “principle of least effort” that defines an efficient payment is the most important criterion for two main reasons. Firstly, it is more convenient for transactors and, secondly, it limits the production costs of denominations incurred by the central bank. Exploiting production cost data for the U.S. currency system in 2010, we show using simulations that efficient payments actually increase the annual production costs of the Federal Reserve by $156 million. As a consequence, we raise a larger issue for central banks which consists in issuing an efficient denominational mix that is more convenient for transactors and that reduces the production costs of denominations.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 5 ()
Pages: 1579-1584

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:5:p:1579-1584

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Currency denominations; Efficient payments; Cost of cash transactions; Production costs; Central banks;

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References

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  1. Kippers, J. & Franses, Ph.H.B.F., 2003. "An empirical analysis of euro cash payments," Econometric Institute Research Papers EI 2003-25, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
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  10. Bouhdaoui, Y. & Bounie, D. & Van Hove, L., 2011. "Central banks and their banknote series: The efficiency-cost trade-off," Economic Modelling, Elsevier, vol. 28(4), pages 1482-1488, July.
  11. Garcia-Swartz Daniel D. & Hahn Robert W. & Layne-Farrar Anne, 2006. "The Move Toward a Cashless Society: A Closer Look at Payment Instrument Economics," Review of Network Economics, De Gruyter, vol. 5(2), pages 1-24, June.
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  16. Mark A. Wynne, 1997. "More on optimal denominations for coins and currency," Working Papers 9702, Federal Reserve Bank of Dallas.
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