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Central Banks and Payment Instruments: a Serious Case of Schizophrenia

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  • VAN HOVE, Leo
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    Abstract

    This article analyses the competition between cash and payment cards against the backdrop of the dual role of central banks - as issuers of cash and as institutions with a mandate to foster the efficiency of payment systems in general. It is argued that this dual role results in a number of policy dilemmas, namely concerning pricing, traceability of banknotes and the choice of denominations of coins and banknotes. On a general level, the article argues that central banks should place greater emphasis on improving the efficiency of retail payments and less on protecting their self-interest. More concretely, the article repeats the suggestion - originally put forward in VAN HOVE & VUCHELEN (1996) - that the ECB should place the upper limit of its banknote series at EUR 50 instead of EUR 500. It is also argued that policy makers should explicitly foster the use of cost-based pricing and in particular create a legal environment that makes it possible for commercial banks to start using it.

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    File URL: http://mpra.ub.uni-muenchen.de/5281/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5281.

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    Date of creation: Jun 2007
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    Handle: RePEc:pra:mprapa:5281

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    Related research

    Keywords: payment instruments; central banks; cash; banknotes; payment cards; public policy; efficiency;

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    1. repec:kap:decono:v:154:y:2006:i:3:p:345-372 is not listed on IDEAS
    2. Nicole Jonker & Thijs Kettenis, 2007. "Explaining cash usage in the Netherlands: the effect of electronic payment instruments," DNB Working Papers 136, Netherlands Central Bank, Research Department.
    3. Stix, Helmut & Wagner, Karin & Mooslechner, Peter, 2006. "How Are Payments Made in Austria?," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 111–134.
    4. David Humphrey & Moshe Kim & Bent Vale, 1998. "Realizing the gains from electronic payments: costs, pricing, and payment choice," Proceedings 586, Federal Reserve Bank of Chicago.
    5. Leo Van Hove, 1999. "Electronic money and the network externalities theory: lessons for real life," Netnomics, Springer, vol. 1(2), pages 137-171, October.
    6. Nicole Jonker & Bram Scholten & Marco Wind (DNB) & Martijn van Emmerik & Marieke van der Hoeven (TNO Human Factors), 2006. "Counterfeit or genuine: can you tell the difference?," DNB Working Papers 121, Netherlands Central Bank, Research Department.
    7. Verdier, Marianne, 2006. "Retail Payment Systems: What can we Learn from Two-Sided Markets?," MPRA Paper 2606, University Library of Munich, Germany.
    8. Schautzer, Anton, 2007. "Cash Logistics in Austria and the Euro Area," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 138–149.
    9. Mathias Drehmann & Charles Goodhart & Malte Krueger, 2002. "The challenges facing currency usage: will the traditional transaction medium be able to resist competition from the new technologies?," Economic Policy, CEPR & CES & MSH, vol. 17(34), pages 193-228, 04.
    10. W. Bolt, 2003. "Retail Payments in the Netherlands: some Facts and Some Theory," WO Research Memoranda (discontinued) 722, Netherlands Central Bank, Research Department.
    11. Holzfeind, Robert & Handig, Martin, 2007. "Euro Banknotes in Circulation and the Allocation of Monetary Income within the Eurosystem," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 150–163.
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    Cited by:
    1. Krueger, Malte, 2009. "The Pricing of Payments," MPRA Paper 24759, University Library of Munich, Germany.
    2. Bouhdaoui, Y. & Bounie, D. & Van Hove, L., 2013. "When do plastic bills lower the bill for the central bank? A model and estimates for the U.S," Journal of Policy Modeling, Elsevier, vol. 35(1), pages 45-60.

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