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

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  • 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
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    Cited by:

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    3. Arango-Arango, Carlos A. & Bouhdaoui, Yassine & Bounie, David & Eschelbach, Martina & Hernandez, Lola, 2018. "Cash remains top-of-wallet! International evidence from payment diaries," Economic Modelling, Elsevier, vol. 69(C), pages 38-48.
    4. Arkadiusz Manikowski, 2017. "Analysis of the denomination structure of the Polish currency in the context of the launch of the new 500 zloty banknote," Bank i Kredyt, Narodowy Bank Polski, vol. 48(5), pages 495-530.

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    More about this item

    Keywords

    Currency denominations; Efficient payments; Cost of cash transactions; Production costs; Central banks;
    All these keywords.

    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

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