On the Socially Optimal Density of Coin and Banknote Series: Do Production Costs Really Matter?

Posted: 24 May 2017

See all articles by Yassine Bouhdaoui

Yassine Bouhdaoui

Vrije Universiteit Brussel

Leo Van Hove

Vrije Universiteit Brussel (VUB)

Date Written: June 1, 2017


By adding denominations to their coin and banknote series central banks can increase the efficiency of cash payments. In practice, however, they opt for a denominational structure with a relatively low density. The literature holds that this is because of the production costs involved. To test this proposition, we introduce a per-denomination fixed cost into the matching model of Lee et al. (2005) and parameterize the model with data on the production of US dollar banknotes. Our simulations demonstrate that central banks could increase the density of their currency systems beyond the observed level without the efficiency gains for transactors being dwarfed by the additional production costs for the central bank itself. This suggests that the explanation for the low density rather lies with costs incurred by consumers and merchants - and anticipated by central banks - that are not yet in any of the extant models.

Keywords: Banknotes, Central Banks, Denominational Structure, Social Cost, Matching Model

JEL Classification: E40, E42, E47

Suggested Citation

Bouhdaoui, Yassine and Van Hove, Leo, On the Socially Optimal Density of Coin and Banknote Series: Do Production Costs Really Matter? (June 1, 2017). Journal of Macroeconomics, Volume 52, Pages 252–267, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2972025

Yassine Bouhdaoui (Contact Author)

Vrije Universiteit Brussel ( email )

Boulevard de la Plaine 2
Ixelles, 1050

Leo Van Hove

Vrije Universiteit Brussel (VUB) ( email )

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

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

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