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Managing a Bank's Currency Inventory Under New Federal Reserve Guidelines

Listed author(s):
  • Neil Geismar


    (Department of Management and Marketing, Prairie View A& M University, P. O. Box 519, MS 2315, Prarie View, Texas 77446-0638)

  • Milind Dawande


    (School of Management, University of Texas at Dallas, 2601 North Floyd Road, Richardson, Texas 75080)

  • Divakar Rajamani


    (School of Management, University of Texas at Dallas, 2601 North Floyd Road, Richardson, Texas 75080)

  • Chelliah Sriskandarajah


    (School of Management, University of Texas at Dallas, 2601 North Floyd Road, Richardson, Texas 75080)

Registered author(s):

    New currency recirculation guidelines implemented by the Federal Reserve System (Fed) of the United States are intended to reduce the overuse of its currency processing services by depository institutions (banks). These changes are expected to have a significant impact on operating policies at those depository institutions that handle large volumes of currency. We describe two business models that capture the flow of currency between a bank and the Fed; the first model captures the current operations of most banks, while the second is expected to be adapted by many banks in response to the new guidelines. Motivated by our work with Brink's, Inc., to assess the economic impact that banks will sustain from these guidelines, we present a detailed analysis that provides managers of banks with optimal strategies to manage the flow of currency to and from the Fed for a variety of cost structures and demand patterns. Given this insight into a bank's optimal behavior, the Fed can also use our analysis to fine tune its guidelines to achieve the desired goals.

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    Article provided by INFORMS in its journal Manufacturing & Service Operations Management.

    Volume (Year): 9 (2007)
    Issue (Month): 2 (March)
    Pages: 147-167

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    Handle: RePEc:inm:ormsom:v:9:y:2007:i:2:p:147-167
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    References listed on IDEAS
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    1. Zhi-Long Chen & George L. Vairaktarakis, 2005. "Integrated Scheduling of Production and Distribution Operations," Management Science, INFORMS, vol. 51(4), pages 614-628, April.
    2. Gregor W. Smith, 1989. "Transactions Demand for Money with a Stochastic, Time-Varying Interest Rate," Review of Economic Studies, Oxford University Press, vol. 56(4), pages 623-633.
    3. George M. Constantinides, 1976. "Stochastic Cash Management with Fixed and Proportional Transaction Costs," Management Science, INFORMS, vol. 22(12), pages 1320-1331, August.
    4. Fase, M. M. G., 1981. "Forecasting the demand for banknotes: some empirical results for the Netherlands," European Journal of Operational Research, Elsevier, vol. 6(3), pages 269-278, March.
    5. Harvey M. Wagner & Thomson M. Whitin, 1958. "Dynamic Version of the Economic Lot Size Model," Management Science, INFORMS, vol. 5(1), pages 89-96, October.
    6. Massoud, Nadia, 2005. "How should Central Banks determine and control their bank note inventory?," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 3099-3119, December.
    7. Nadia Makary Girgis, 1968. "Optimal Cash Balance Levels," Management Science, INFORMS, vol. 15(3), pages 130-140, November.
    8. Fleischmann, Moritz & Bloemhof-Ruwaard, Jacqueline M. & Dekker, Rommert & van der Laan, Erwin & van Nunen, Jo A. E. E. & Van Wassenhove, Luk N., 1997. "Quantitative models for reverse logistics: A review," European Journal of Operational Research, Elsevier, vol. 103(1), pages 1-17, November.
    9. 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.
    10. Eppen, Gary D & Fama, Eugene F, 1969. "Cash Balance and Simple Dynamic Portfolio Problems with Proportional Costs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(2), pages 119-133, June.
    11. Edwin H. Neave, 1970. "The Stochastic Cash Balance Problem with Fixed Costs for Increases and Decreases," Management Science, INFORMS, vol. 16(7), pages 472-490, March.
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