Central Banks and Their Banknote Series: The Efficiency-Cost Trade-Off

22 Pages Posted: 3 Sep 2010 Last revised: 3 Feb 2011

See all articles by Yassine Bouhdaoui

Yassine Bouhdaoui

Vrije Universiteit Brussel

David Bounie

Télécom Paris

Leo Van Hove

Vrije Universiteit Brussel (VUB)

Date Written: February 1, 2010

Abstract

One of the most important results of theoretical research on currency systems is that spacing denominations apart by a factor of two is better than a factor of three as this lowers the average number of notes and coins exchanged in transactions. These theoretical studies also claim that an efficient denominational mix has the additional benefit of keeping down the production costs incurred by the central bank. This paper challenges this claim and demonstrates that more efficient currency systems can also be more costly. Central banks therefore face an efficiency-cost trade-off and have to weigh the benefits for transactors against those for the central bank itself.

Keywords: Currency, Central banks, Efficient payments, Production

JEL Classification: E4, E42, E47

Suggested Citation

Bouhdaoui, Yassine and Bounie, David and Van Hove, Leo, Central Banks and Their Banknote Series: The Efficiency-Cost Trade-Off (February 1, 2010). Available at SSRN: https://ssrn.com/abstract=1670024 or http://dx.doi.org/10.2139/ssrn.1670024

Yassine Bouhdaoui

Vrije Universiteit Brussel ( email )

Boulevard de la Plaine 2
Ixelles, 1050
Belgium

David Bounie

Télécom Paris ( email )

19 Place Marguerite Perey
Palaiseau, 91120
France

Leo Van Hove (Contact Author)

Vrije Universiteit Brussel (VUB) ( email )

Department of Applied Economics (APEC)
Pleinlaan 5
Brussels, B-1050
Belgium
+32 2 614 84 49 (Phone)

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

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