IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v29y2012i5p1579-1584.html
   My bibliography  Save this article

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

Author

Listed:
  • 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.

Suggested Citation

  • Bouhdaoui, Y. & Bounie, D., 2012. "Efficient payments: How much do they cost for the Central Bank?," Economic Modelling, Elsevier, vol. 29(5), pages 1579-1584.
  • Handle: RePEc:eee:ecmode:v:29:y:2012:i:5:p:1579-1584
    DOI: 10.1016/j.econmod.2012.04.026
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999312001411
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Tschoegl, Adrian E, 1997. "The Optimal Denomination of Currency: A Conjecture," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 546-554, November.
    2. Telser, L. G., 1995. "Optimal denominations for coins and currency," Economics Letters, Elsevier, vol. 49(4), pages 425-427, October.
    3. 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.
    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.
    5. 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.
    6. Franses, Philip Hans & Kippers, Jeanine, 2007. "An empirical analysis of euro cash payments," European Economic Review, Elsevier, vol. 51(8), pages 1985-1997, November.
    7. Cramer, J. S., 1983. "Currency by denomination," Economics Letters, Elsevier, vol. 12(3-4), pages 299-303.
    8. Geoffrey R. Gerdes & Jack K. Walton & 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.
    9. N/A, 1996. "Note:," Foreign Trade Review, , vol. 31(1-2), pages 1-1, January.
    10. Boeschoten, W C & Fase, M M G, 1989. "The Way We Pay with Money," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(3), pages 319-326, July.
    11. Manjong Lee & Neil Wallace & Tao Zhu, 2005. "Modeling Denomination Structures," Econometrica, Econometric Society, vol. 73(3), pages 949-960, May.
    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, 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 1015-1021, November.
    14. Sumner, Scott, 1993. "Privatizing the Mint," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 13-29, February.
    15. Wynne, Mark A., 1997. "More on optimal denominations for coins and currency," Economics Letters, Elsevier, vol. 55(2), pages 221-225, August.
    16. 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.
    17. Sébastien Lotz & Guillaume Rocheteau, 2004. "The fate of one-dollar coins in the U.S," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:eee:jmacro:v:52:y:2017:i:c:p:252-267 is not listed on IDEAS
    2. repec:eee:ecmode:v:69:y:2018:i:c:p:38-48 is not listed on IDEAS
    3. Van Hove, Leo, 2015. "Modelling banknote printing costs: of cohorts, generations, and note-years," Economic Modelling, Elsevier, vol. 46(C), pages 238-249.

    More about this item

    Keywords

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

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:29:y:2012:i:5:p:1579-1584. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.