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

  • Bouhdaoui, Y.
  • Bounie, D.

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  1. Mark A. Wynne, 1997. "More on optimal denominations for coins and currency," Working Papers 9702, Federal Reserve Bank of Dallas.
  2. Sumner, Scott, 1993. "Privatizing the Mint," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 13-29, February.
  3. Manjong Lee & Neil Wallace & Tao Zhu, 2005. "Modeling Denomination Structures," Econometrica, Econometric Society, vol. 73(3), pages 949-960, 05.
  4. Richard K. Abrams, 1995. "The Design and Printing of Bank Notes; Considerations When Introducing a New Currency," IMF Working Papers 95/26, International Monetary Fund.
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  7. 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.
  8. 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.
  9. Sébastien Lotz & Guillaume Rocheteau, 2004. "The fate of one-dollar coins in the U.S," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
  10. 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.
  11. Telser, L. G., 1995. "Optimal denominations for coins and currency," Economics Letters, Elsevier, vol. 49(4), pages 425-427, October.
  12. Guibourg, Gabriela & Segendorff, Bjorn, 2007. "A note on the price- and cost structure of retail payment services in the Swedish banking sector 2002," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2817-2827, September.
  13. van Hove, Leo & Heyndels, Bruno, 1996. "On the optimal spacing of currency denominations," European Journal of Operational Research, Elsevier, vol. 90(3), pages 547-552, May.
  14. Geoffrey R. Gerdes & Jack K. Walton II & May X. Liu & Darrel W. Parke, 2005. "Trends in the use of payment instruments in the United States," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Spr, pages 180-201.
  15. Van Hove, Leo, 2001. "Optimal Denominations for Coins and Bank Notes: In Defense of the Principle of Least Effort," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 1015-21, November.
  16. Tschoegl, Adrian E, 1997. "The Optimal Denomination of Currency: A Conjecture," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 546-54, November.
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