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 cross-section of 56 central banks. We identified that central banks have implemented new strategies to increase efficiency in the production of banknotes to response for the increasing demand for currency. One of these strategies has been to involve the private sector through different modalities (i.e. joint ventures, subsidiaries or purchases of banknotes from specialized companies). A trans-log cost function is estimated by using a panel data model with random effects. We find that denomination structure, size of banknotes, and production modalities used by central banks have a significant impact on printing costs. Government printing was found to be the most costly strategy, while involving companies in the process substantially reduces production costs. Based on these results, a non-parametric efficient frontier model was used to measure technical cost efficiency and changes in productivity of central banks. We found that most central banks have increased its technical efficiency during the period, especially when the private sector has been involved. The Malmquist index showed a moderate increase in productivity, mainly due to increases in scale efficiency instead of technical change.

Keywords: Central Banks, Banknote Printing, Efficiency Frontier, Cost Function, Panel Data, Malmquist Index

JEL Classification: E50, C33, C23, C43