Working Paper: NBER ID: w20126
Authors: Kenneth S. Rogoff
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 Reserve'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.
Keywords: No keywords provided
JEL Codes: E41; E51; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| existence of paper currency (E42) | complicates central banks' ability to set policy interest rates below zero (E43) |
| absence of cash (E41) | more flexible monetary policy (E63) |
| paper currency (E42) | facilitates tax evasion and illegal activities (H26) |
| anonymity provided by cash (E41) | influences level of illegal economic transactions (P37) |
| eliminating large-denomination notes (E42) | reduce capacity for tax evasion (H26) |
| cash holdings (E41) | underground economy (E26) |