Empirical causality between bigger banknotes and inflation

Abstract

Monetary theory predicts that high inflation rates may imply the need for bigger banknotes. At the same time, monetary authorities may fear that introducing higher-valued banknotes leads to inflation. This paper concerns an analysis of 40 years of data on inflation and denominations for 59 countries, and it reports that causality runs from inflation to banknotes and not the other way around.

Acknowledgements

Thanks are due to Lotje Kruithof for excellent research assistance. The data and detailed estimation results are available upon request from the author.