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When do plastic bills lower the bill for the central bank? A model and estimates for the U.S

Author

Listed:
  • Bouhdaoui, Y.
  • Bounie, D.
  • Van Hove, L.

Abstract

We develop an analytical framework that allows central banks to assess whether changing the manufacturing material of their tokens would be beneficial. Applied to the case of the U.S., we find that a complete adoption of plastic notes would save the Fed $140 million per year but would entail a substantial migration cost in case of a “big bang”. On the level of individual denominations, we find that the $1 bill would be the most lucrative to replace and that the business case for the $100 bill is thin – suggesting that a partial adoption of polymer would make more sense.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:jpolmo:v:35:y:2013:i:1:p:45-60
    DOI: 10.1016/j.jpolmod.2012.08.001
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    References listed on IDEAS

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    1. Menzies, Gordon, 2004. "Money to burn, or melt? A cost-benefit analysis of Australian polymer banknotes," The North American Journal of Economics and Finance, Elsevier, vol. 15(3), pages 355-368, December.
    2. Leo Van Hove, 2004. "Cost-based Pricing of Payment Instruments: the State of the Debate," De Economist, Springer, vol. 152(1), pages 79-100, March.
    3. Jorge E. Galán and & Miguel Sarmiento, 2008. "Banknote Printing at Modern central Banking: Trends, Costs and Efficiency," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 217-262, July-Dece.
    4. Anikó Turján & Éva Divéki & Éva Keszy-Harmath & Gergely Kóczán & Kristóf Takács, 2011. "Nothing is free: a survey of the social cost of the main payment instruments in Hungary," MNB Occasional Papers 2011/93, Magyar Nemzeti Bank (Central Bank of Hungary).
    5. Alami, Tarik H., 2001. "Currency substitution versus dollarization: A portfolio balance model," Journal of Policy Modeling, Elsevier, vol. 23(4), pages 473-479, May.
    6. Boeschoten, Willem C & Fase, Martin M G, 1992. "The Demand for Large Bank Notes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(3), pages 319-337, August.
    7. Fumiko Hayashi & William R. Keeton, 2012. "Measuring the costs of retail payment methods," Economic Review, Federal Reserve Bank of Kansas City, issue Q II.
    8. VAN HOVE, Leo, 2007. "Central Banks and Payment Instruments: a Serious Case of Schizophrenia," MPRA Paper 5281, University Library of Munich, Germany.
    9. Ruth Judson & Richard D. Porter, 2003. "Estimating the worldwide volume of counterfeit U.S. currency: data and extrapolation," Finance and Economics Discussion Series 2003-52, Board of Governors of the Federal Reserve System (U.S.).
    10. Manfred J. M. Neumann, 1992. "Seigniorage in the United States: how much does the U.S. government make from money production?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 29-40.
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    Citations

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    Cited by:

    1. Deinhammer, Harald & Ladi, Anna, 2017. "Modelling euro banknote quality in circulation," Occasional Paper Series 204, European Central Bank.
    2. Van Hove, Leo, 2015. "Modelling banknote printing costs: of cohorts, generations, and note-years," Economic Modelling, Elsevier, vol. 46(C), pages 238-249.
    3. repec:eee:jmacro:v:52:y:2017:i:c:p:252-267 is not listed on IDEAS
    4. de Heij, Hans, 2017. "A model for use-centered design of payment instruments applied to banknotes : Upid-model," Other publications TiSEM 981fb06b-8f61-4652-aedb-6, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    Central banks; Plastic banknotes; Production costs; Seigniorage;

    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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