Cash payments and the penny policy debate

•We describe a model of optimal consumer-merchant exchange of cash payments.•Diary data are used to quantify the burden of exchanging currency notes and coins.•The model and data are used to analyze the effects of eliminating the one-penny coin.•Penny elimination would reduce the burden of exchangin...

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Bibliographic Details
Published in:Journal of economic behavior & organization 2023-04, Vol.208, p.80-94
Main Authors: Prescott, Brian C., Shy, Oz
Format: Article
Language:English
Subjects:
Burden of exchanging cash
Cash transactions
Optimal currency denominations
Penny elimination
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Summary:•We describe a model of optimal consumer-merchant exchange of cash payments.•Diary data are used to quantify the burden of exchanging currency notes and coins.•The model and data are used to analyze the effects of eliminating the one-penny coin.•Penny elimination would reduce the burden of exchanging cash.•Penny elimination would result in little or no inflationary consequences.•Elimination of the penny and the nickel would not reduce this burden relative to penny elimination only. This article quantifies the burden of exchanging currency notes and coins using a model of optimal consumer-merchant exchange of cash payments and consumer payment choice diary data. The model is then applied to analyze a policy debate whether to eliminate the penny coin from circulation. We find that penny elimination would reduce the burden of exchanging cash and will not have any significant inflationary consequences caused by price rounding. Surprisingly, a removal of both the penny and nickel coins from circulation would slightly increase (not decrease) the burden relative to penny elimination only.
ISSN:0167-2681
1879-1751
DOI:10.1016/j.jebo.2023.01.024