Journal of Financial Market Infrastructures

Risk.net

Banknote printing in a less-cash society: innovate or not?

Leo Van Hove

  • In a less-cash society, central banks run the risk of overinvesting in banknote printing technology.
  • The relative cost-effectiveness of polymer vs. paper banknotes depends on their durability and cost of production, but a simple durability/cost-ratio can be very misleading.
  • Central banks that find themselves confronted with dwindling currency demand should try to re-inject redundant notes as much as possible.
  • When a note of a new design is launched, central banks might want to let notes of the old design in circulation for longer than is currently the case.

ABSTRACT

This paper models the banknote printing costs of a central bank in a society that uses progressively less cash. In such a setting, the central bank runs the risk of overinvesting when it introduces a new technology, for example, when it switches from paper to polymer notes. This paper shows that simple durability/cost rules of thumb are unhelpful in determining the viability of a switch to polymer, and that the size of the decrease in currency demand matters, albeit not in a monotonous way. A key factor is how the fall in demand compares with the note replacement rate. Simulations for three Nordic countries illustrate our findings.

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