Does Banknote Quality Affect Counterfeit Detection? Experimental Evidence from Germany and the Netherlands

Counterfeit prevention is a major concern for central banks. In search of effective policy measures, it is often claimed that a clean banknote circulation helps the general public to more easily detect counterfeits. To examine this claim, we conducted an experimental study with 250 consumers and 261 cashiers in the Netherlands and Germany. Participants received 200 banknotes with either a high or a low average soil level. The banknote test sets contained 20 counterfeits to be detected by the participants. For the regression analysis we applied approaches used in the area of psychophysical science (signal detection theory). Our candidates identified more counterfeits when sorting clean banknotes. However, our analysis also showed that the cleanliness of banknotes does not actually help the person checking the banknote to more easily distinguish a counterfeit banknote from a genuine note. In fact, new and clean banknotes raised suspicion: they were more often declared as counterfeits – correctly or not. We discuss the implication of our results for central banks’ banknote policies.