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On the welfare effects of phasing out paper currency

Julio Garín, William Lastrapes () and Robert Lester ()

European Economic Review, 2021, vol. 137, issue C

Abstract: We quantify the welfare effects of cash suppression policies within a general equilibrium model where cash reduces transactions costs and aids tax evasion in underground markets. In the model, currency suppression increases transactions costs and raises effective tax rates, but shifts resources out of costly underground markets and relaxes the government budget. When coupled with a reduction in distortionary taxes on consumption or factor inputs to ensure budget neutrality, cash suppression policies increase welfare in our baseline representative agent model. In a model with individual heterogeneity in cash use, suppression increases welfare for all, but by less for cash-intensive users.

Keywords: Cash; Currency suppression; Monetary policy; Demonetization (search for similar items in EconPapers)
JEL-codes: E26 E42 E51 E52 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.euroecorev.2021.103780

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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