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When do plastic bills lower the bill for the central bank? A model and estimates for the U.S

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  • Bouhdaoui, Y.
  • Bounie, D.
  • Van Hove, L.

Abstract

We develop an analytical framework that allows central banks to assess whether changing the manufacturing material of their tokens would be beneficial. Applied to the case of the U.S., we find that a complete adoption of plastic notes would save the Fed $140 million per year but would entail a substantial migration cost in case of a “big bang”. On the level of individual denominations, we find that the $1 bill would be the most lucrative to replace and that the business case for the $100 bill is thin – suggesting that a partial adoption of polymer would make more sense.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 35 (2013)
Issue (Month): 1 ()
Pages: 45-60

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Handle: RePEc:eee:jpolmo:v:35:y:2013:i:1:p:45-60

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Web page: http://www.elsevier.com/locate/inca/505735

Related research

Keywords: Central banks; Plastic banknotes; Production costs; Seigniorage;

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References

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  1. Leo Van Hove, 2004. "Cost-based Pricing of Payment Instruments: the State of the Debate," De Economist, Springer, vol. 152(1), pages 79-100, 03.
  2. Anikó Turján & Éva Divéki & Éva Keszy-Harmath & Gergely Kóczán & Kristóf Takács, 2011. "Nothing is free: a survey of the social cost of the main payment instruments in Hungary," MNB Occasional Papers 2011/93, Magyar Nemzeti Bank (the central bank of Hungary).
  3. Fumiko Hayashi & William R. Keeton, 2012. "Measuring the costs of retail payment methods," Economic Review, Federal Reserve Bank of Kansas City, issue Q II.
  4. Ruth Judson & Richard Porter, 2003. "Estimating the worldwide volume of counterfeit U.S. currency: data and extrapolation," Finance and Economics Discussion Series 2003-52, Board of Governors of the Federal Reserve System (U.S.).
  5. Jorge Eduardo Galán Camacho & Miguel Sarmiento Paipilla, 2007. "Banknote Printing At Modern Central Banking:Trends, Costs, And Efficiency," BORRADORES DE ECONOMIA 004393, BANCO DE LA REPÚBLICA.
  6. Menzies, Gordon, 2004. "Money to burn, or melt? A cost-benefit analysis of Australian polymer banknotes," The North American Journal of Economics and Finance, Elsevier, vol. 15(3), pages 355-368, December.
  7. VAN HOVE, Leo, 2007. "Central Banks and Payment Instruments: a Serious Case of Schizophrenia," MPRA Paper 5281, University Library of Munich, Germany.
  8. Alami, Tarik H., 2001. "Currency substitution versus dollarization: A portfolio balance model," Journal of Policy Modeling, Elsevier, vol. 23(4), pages 473-479, May.
  9. Manfred J.M. Neumann, 1992. "Seigniorage in the United States: how much does the U.S. government make from money production?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 29-40.
  10. Boeschoten, Willem C & Fase, Martin M G, 1992. "The Demand for Large Bank Notes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(3), pages 319-37, August.
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