Journal Article

Blessing or curse? Foreign and underground demand for euro notes

Kenneth Rogoff

in Economic Policy

Published on behalf of Center for Economic Studies of the University of Munich

Volume 13, issue 26, pages 262-303
Published in print April 1998 | ISSN: 0266-4658
Published online July 2014 | e-ISSN: 1468-0327 | DOI: https://dx.doi.org/10.1111/1468-0327.00033
Blessing or curse? Foreign and underground demand for euro notes

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SUMMARY

Public finance solutions to the European unemployment problem?

Developing countries may hold as much as 25-30% of the $1.3 trillion OECD currency supply. Although dollar holdings appear to exceed DM holdings by a factor of four, the advent of the euro may change this balance. Indeed, by issuing large-denomination notes of 100, 200 and 500, the European Central Bank appears to be well poised to challenge the dominance of the ubiquitous US $100 note. However, large-denomination notes are also extremely popular in the OECD underground economy, which appears to hold at least 50% of the currency supply. As a result, the seigniorage revenues obtained by issuing large-denomination notes may be an accounting illusion, substantially or fully offset by losses due to increased tax evasion. Hence, the new European Central Bank may wish to consider policies that discourage underground use of currency, even at the expense of losing out on foreign demand.

— Kenneth Rogoff

Journal Article.  0 words. 

Subjects: Economic Growth and Aggregate Productivity ; Financial Regulation ; Health, Education, and Welfare ; Labour and Demographic Economics ; Macroeconomics and Monetary Economics ; Public Economics ; Regional Government Analysis

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