Costs and Benefits to Phasing out Paper Currency

Kenneth Rogoff

doi:10.1086/680657

Abstract

Despite advances in transactions technologies, paper currency still constitutes a notable percentage of the money supply in most countries. For example, it constitutes roughly 10% of the US Federal Reserveâ€™s main monetary aggregate, M2. Yet, it has important drawbacks. First, it can help facilitate activity in the underground (tax-evading) and illegal economy. Second, its existence creates the artifact of the zero bound on the nominal interest rate. On the other hand, the enduring popularity of paper currency generates many benefits, including substantial seigniorage revenue. This paper explores some of the issues associated with phasing out paper currency, especially large-denomination notes.

Highlights

As interest rates have fallen to near zero in recent years, it is not surprising that the demand for currency in the domestic US economy appears to have risen; using similar techniques to her earlier work, Judson (2012) estimates around 50% of US dollars are held domestically post financial crisis
This paper explores the costs and benefits to phasing out paper currency, beginning with large-denomination notes, later extending to all but small coins and bills, and eventually those as well
Paper currency has two very distinct properties that should draw our attention. It is precisely the existence of paper currency that makes it difficult for central banks to take policy interest rates much below zero, a limitation that seems to have become increasingly relevant during this century

Summary

Introduction

As interest rates have fallen to near zero in recent years, it is not surprising that the demand for currency in the domestic US economy appears to have risen; using similar techniques to her earlier work, Judson (2012) estimates around 50% of US dollars are held domestically post financial crisis.

Results

Conclusion