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Production Costs, Seigniorage and Counterfeiting: Central Banks’ Incentives for Improving Their Banknote Technology

49 Pages Posted: 2 Aug 2010 Last revised: 14 Mar 2012

Yassine Bouhdaoui

Vrije Universiteit Brussel

David Bounie

Telecom ParisTech

Leo Van Hove

Vrije Universiteit Brussel (VUB)

Date Written: March 13, 2012

Abstract

In recent years, numerous central banks throughout the world have introduced plastic banknotes in order to combat counterfeiting and reduce their operating costs. In this paper, we provide an analytical framework that allows central banks to assess whether changing the manufacturing material of their coins or banknotes would be beneficial. We use this framework to estimate, for the case of the U.S. Federal Reserve, the potential operating gains and the break-even horizon of the adoption of plastic banknotes. In our benchmark scenario, we find that a complete adoption of plastic notes would save the Fed $140 million per year, and that the $1 bill would be the most lucrative to replace.

Keywords: Central Banks, Counterfeiting, Plastic Banknotes, Production Costs, Seigniorage Revenue

JEL Classification: E4, E47

Suggested Citation

Bouhdaoui, Yassine and Bounie, David and Van Hove, Leo, Production Costs, Seigniorage and Counterfeiting: Central Banks’ Incentives for Improving Their Banknote Technology (March 13, 2012). Available at SSRN: https://ssrn.com/abstract=1652173 or http://dx.doi.org/10.2139/ssrn.1652173

Yassine Bouhdaoui

Vrije Universiteit Brussel ( email )

Boulevard de la Plaine 2
Ixelles, 1050
Belgium

David Bounie (Contact Author)

Telecom ParisTech ( email )

46 rue Barrault
F-75634 Paris, Cedex 13
France

Leo Van Hove

Vrije Universiteit Brussel (VUB) ( email )

Department of Applied Economics (APEC)
Pleinlaan 2
Brussels, B-1050
Belgium
+32 2 629 21 25 (Phone)
+32 2 629 20 60 (Fax)

HOME PAGE: http://research.vub.ac.be/applied-economics/members

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