On the socially optimal density of coin and banknote series: Do production costs really matter?
Yassine Bouhdaoui and
Leo Van Hove
Journal of Macroeconomics, 2017, vol. 52, issue C, 252-267
Abstract:
By adding denominations to their coin and banknote series central banks can increase the efficiency of cash payments. In practice, however, they opt for a denominational structure with a relatively low density. The literature holds that this is because of the production costs involved. To test this proposition, we introduce a per-denomination fixed cost into the matching model of Lee et al. (2005) and parameterize the model with data on the production of US dollar banknotes. Our simulations demonstrate that central banks could increase the density of their currency systems beyond the observed level without the efficiency gains for transactors being dwarfed by the additional production costs for the central bank itself. This suggests that the explanation for the low density rather lies with costs incurred by consumers and merchants - and anticipated by central banks - that are not yet in any of the extant models.
Keywords: Denominational structure; Banknotes; Central bank; Social cost; Matching model (search for similar items in EconPapers)
JEL-codes: E40 E42 E47 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (2)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0164070417301751
Full text for ScienceDirect subscribers only
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:52:y:2017:i:c:p:252-267
DOI: 10.1016/j.jmacro.2017.05.002
Access Statistics for this article
Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos
More articles in Journal of Macroeconomics from Elsevier
Bibliographic data for series maintained by Catherine Liu (repec@elsevier.com).