Efficient Payments: How Much Do They Cost for the Central Bank?

18 Pages Posted: 23 Jun 2010 Last revised: 23 Apr 2012

See all articles by David Bounie

David Bounie

Telecom ParisTech

Yassine Bouhdaoui

Vrije Universiteit Brussel

Date Written: April 20, 2012

Abstract

Previous works related to optimal denominations for coins and banknotes consider that the “principle of least effort” that defines an efficient payment is the most important criterion for two main reasons. Firstly, it is more convenient for transactors and, secondly, it limits the production costs of denominations incurred by the central bank. Exploiting production cost data for the U.S. currency system in 2010, we show using simulations that efficient payments actually increase the annual production costs of the Federal Reserve by $156 million. As a consequence, we raise a larger issue for central banks which consists in issuing an efficient denominational mix that is more convenient for transactors and that reduces the production costs of denominations.

Keywords: Currency Denominations, Efficient Payments, Production costs, Central banks

JEL Classification: E4, E47

Suggested Citation

Bounie, David and Bouhdaoui, Yassine, Efficient Payments: How Much Do They Cost for the Central Bank? (April 20, 2012). Available at SSRN: https://ssrn.com/abstract=1629192 or http://dx.doi.org/10.2139/ssrn.1629192

David Bounie (Contact Author)

Telecom ParisTech ( email )

46 rue Barrault
F-75634 Paris, Cedex 13
France

Yassine Bouhdaoui

Vrije Universiteit Brussel ( email )

Boulevard de la Plaine 2
Ixelles, 1050
Belgium

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