Cash Payments and the Penny Policy Debate

Authors: Brian Prescott and Oz Shy

Journal of Economic Behavior and Organization, 2023.

Link to published article.

Abstract: This article constructs a model of optimal consumer-merchant exchange of cash payments. We use consumer payment choice diary data to quantify the burden of exchanging currency notes and coins. 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 but 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.

Keywords: Optimal currency denominations; cash transactions; burden of change; penny elimination

JEL classification: D12; E42; G59