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Estimates of scale and cost efficiency for Federal Reserve currency operations

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Author Info

  • James Bohn
  • Diana Hancock
  • Paul Bauer

Abstract

Meeting the currency demands of depository institutions, businesses, and consumers costs the Federal Reserve more than half a billion dollars each year, yet, very little research has been devoted to understanding what factors affect such costs. The authors estimate a cost function in order to obtain estimates of scale and cost efficiency for this service. They find that as in other paper-based technologies, such as checks, scale economies are achieved at a relatively low level of output, implying that currency services are not a natural monopoly. They also provide estimates of facility-specific marginal costs and returns to scale measures that could be used to improve resource allocations. Lastly, they find that the average processing facility operates at more 80 percent of the efficiency of the “best practice” facility, comparable to cost efficiency estimates that have been reported elsewhere for private-sector financial institutions.

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File URL: http://www.clevelandfed.org/research/Review/2001/scale.pdf
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File URL: http://www.clevelandfed.org/research/Review/2001/scale.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of Cleveland in its journal Economic Review.

Volume (Year): (2001)
Issue (Month): Q IV ()
Pages: 2-26

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Handle: RePEc:fip:fedcer:y:2001:i:qiv:p:2-26

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Related research

Keywords: Federal Reserve banks - Costs ; Payment systems;

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Cited by:
  1. Jorge Galán Camacho & Miguel Sarmiento Paipilla, . "Staff, Functions, and Staff Costs at Central Banks: An International Comparison with a Labor-demand Model," Borradores de Economia 419, Banco de la Republica de Colombia.
  2. Takala, Kari & Viren, Matti, 2008. "Efficiency and costs of payments: some new evidence from Finland," Research Discussion Papers 11/2008, Bank of Finland.
  3. Loretta J. Mester, 2003. "Applying efficiency measurement techniques to central banks," Working Papers 03-13, Federal Reserve Bank of Philadelphia.
  4. Jorge Eduardo Galán Camacho & Miguel Sarmiento Paipilla, . "Banknote Printing At Modern Central Banking: Trends, Costs, And Efficiency," Borradores de Economia 476, Banco de la Republica de Colombia.
  5. Robert DeYoung & William C. Hunter & Gregory F. Udell, 2003. "The past, present, and probable future for community banks," Working Paper Series WP-03-14, Federal Reserve Bank of Chicago.

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