Central banks and their banknote series: The efficiency-cost trade-off

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.

Research Highlights► Literature claims that efficient currency systems are least costly for central banks. ► We show that efficient currency systems can be more costly for Central Banks. ► Central banks thus face an efficiency-cost trade-off.