Efficient Payments: How Much Do They Cost for the Central Bank?
18 Pages Posted: 23 Jun 2010 Last revised: 23 Apr 2012
Date Written: April 20, 2012
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: Suggested Citation