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Central banks and their banknote series: The efficiency-cost trade-off

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

Abstract

One of the most important results of theoretical research on currency systems is that spacing denominations apart by a factor of two is better than a factor of three as this lowers the average number of notes and coins exchanged in transactions. These theoretical studies also claim that an efficient denominational mix has the additional benefit of keeping down the production costs incurred by the central bank. This paper challenges this claim and demonstrates that more efficient currency systems can also be more costly. Central banks therefore face an efficiency-cost trade-off and have to weigh the benefits for transactors against those for the central bank itself.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:ecmode:v:28:y:2011:i:4:p:1482-1488
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    References listed on IDEAS

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    Cited by:

    1. Van Hove, Leo, 2015. "Modelling banknote printing costs: of cohorts, generations, and note-years," Economic Modelling, Elsevier, vol. 46(C), pages 238-249.
    2. Bouhdaoui, Yassine & Van Hove, Leo, 2017. "On the socially optimal density of coin and banknote series: Do production costs really matter?," Journal of Macroeconomics, Elsevier, vol. 52(C), pages 252-267.
    3. 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.
    4. Claire Greene & Scott Schuh, 2014. "U.S. consumers' holdings and use of $100 bills," Research Data Report 14-3, Federal Reserve Bank of Boston.
    5. Prescott, Brian C. & Shy, Oz, 2023. "Cash payments and the penny policy debate," Journal of Economic Behavior & Organization, Elsevier, vol. 208(C), pages 80-94.
    6. Geoffrey R. Dunbar & Casey Jones, 2018. "The (Un)Demand for Money in Canada," Staff Working Papers 18-20, Bank of Canada.
    7. Scott L. Fulford & Claire Greene & William Murdock, 2015. "U.S. consumer holdings and use of $1 Bills," Research Data Report 15-1, Federal Reserve Bank of Boston.

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