Yassine Bouhdaoui

Modeling the Share of Cash Payments in the Economy: An Application to France

Modeling the demand for cash and deposits is a primary concern for central banks. Within a wide range of academic contributions, payment choice models based on transaction sizes (TS models) have been promoted. However, TS models induce strong predictions about the use of payment instruments. In particular, all equal-sized transactions are supposed to be paid with the same payment instrument. We propose a simple alternative model based on cash holding (CH model) that allows equal-sized transactions to be paid for in cash or with other payment instruments. Using micro-level payment data from two representative samples of the French population in 2005 and 2011, we test how well each model replicates the observed shares of cash payments in the French economy for each size of transaction. We find that the CH model outperforms TS models, as it better predicts the observed shares of cash payments with notably less demanding information on individuals.

Cash Management and Payment Choices: A Simulation Model with International Comparisons

Despite various payment innovations, today, cash is still heavily used to pay for low-value purchases. This paper develops a simulation model to test whether standard implications of the theory on cash management and payment choices can explain the use of payment instruments by transaction size. In particular, using diary survey data from Canada, France, Germany and the Netherlands, we test the assumption that cash is still the most efficient payment instrument, and the idea that people hold cash for precautionary reasons when facing uncertainty about their future purchases. The results of the simulations show that these two factors are significant determinants of the high shares of low-value cash payments in Canada, France and Germany. Yet, they are not so crucial in the Netherlands, which exhibits a significant share of low-value card transactions. We discuss how the differences in payment markets across countries may explain the performance of the model.

Efficient Payments: How Much Do They Cost for the Central Bank?

Previous works related to optimal denominations for coins and banknotes consider that the “principle of least effort” that defines an efficient payment is the most important criterion for two main reasons. Firstly, it is more convenient for transactors and, secondly, it limits the production costs of denominations incurred by the central bank. Exploiting production cost data for the U.S. currency system in 2010, we show using simulations that efficient payments actually increase the annual production costs of the Federal Reserve by

Production Costs, Seigniorage and Counterfeiting: Central Banks’ Incentives for Improving Their Banknote Technology

156 million. As a consequence, we raise a larger issue for central banks which consists in issuing an efficient denominational mix that is more convenient for transactors and that reduces the production costs of denominations.

Efficient Payments and Price Distribution

In recent years, numerous central banks throughout the world have introduced plastic banknotes in order to combat counterfeiting and reduce their operating costs. In this paper, we provide an analytical framework that allows central banks to assess whether changing the manufacturing material of their coins or banknotes would be beneficial. We use this framework to estimate, for the case of the U.S. Federal Reserve, the potential operating gains and the break-even horizon of the adoption of plastic banknotes. In our benchmark scenario, we find that a complete adoption of plastic notes would save the Fed

The 'Principle of Invariance' in Currency Systems: A Comment on Caianiello et al.

140 million per year, and that the

Central Banks and Their Banknote Series: The Efficiency-Cost Trade-Off

1 bill would be the most lucrative to replace.

Convenient Prices, Cash Payments and Price Rigidity

The studies dealing with the efficiency of monetary denomination systems are usually based on a restrictive assumption: prices paid cash are assumed to be evenly distributed in the economy. Using an empirical (observed) distribution of prices in the French economy, this paper measures the losses in efficiency when using a uniform distribution of prices. We show that i. the average number of tokens used in transactions when observed prices are concerned is around two times less than that obtained when prices are evenly distributed; ii. considering a uniform distribution of prices leads to overestimate the average frequency of use of larger denominations and to underestimate the average frequency of use of lower denominations, at least the one euro denomination; iii. the probability of existence of a price, the number of occurences of a price, the proportion of lower prices and, finally, the proportion of round prices are central to explain the observed payment efficiency. At the end, the simulations provide useful clues to better understanding how and why the price distribution affects payment efficiency.

When do plastic bills lower the bill for the central bank? A model and estimates for the U.S.

In an often-cited article, Caianiello et al. (1982) formulate a “principle of invariance” for currency systems. They build on this principle to explain the distribution of the coins and banknotes in circulation over the different denominations, and to analyze how a currency system adjusts to inflation. This paper shows that Caianiello et al.’s distribution law is flawed because the principle of invariance is false.