Banknote printing at modern central banking: trends, costs, and efficiency

Abstract

This paper examines trends in banknote printing during the period 2000-2005 for a crosssection of 56 central banks. Because of the high increase in the demand for currency in recent years, central banks have implemented new strategies to increase efficiency in the production of banknotes. Some of them, involve the private sector by means of different modalities (e.g. joint ventures, subsidiaries or purchase of banknotes from specialized companies), and the integration of banknote printing and cash processing in a single complex (e.g. Portugal and Colombia). A cost function using a panel data model with random effects was estimated. It was identified that the denomination structure, the size of banknotes, and the production method used by central banks have a significant impact on production costs. Government printing was found to be the most costly method, while private-sector involvement in the process substantially reduces production costs. Using a non-parametric efficient frontier model, it was found that most central banks have increased its technical efficiency during the period, especially in central banks where the privatesector has involved. Computing a Malmquist index through distance functions it was identified that central banks have showed a moderate increase in its productivity, primarily due to increases in efficiency and, in a lower proportion to technical change. In most of the cases, a positive change in efficiency is mainly the result of higher scale efficiency. This could obey to high increase in demand for currency.