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

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 $140 million per year, and that the $1 bill would be the most lucrative to replace