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Blessing or Curse? Foreign and Underground Demand for Euro Notes

Kenneth Rogoff, Francesco Giavazzi and Friedrich Schneider
Economic Policy
Vol. 13, No. 26, EMU (Apr., 1998), pp. 261-303
Stable URL: http://www.jstor.org/stable/1344754
Page Count: 42
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Blessing or Curse? Foreign and Underground Demand for Euro Notes
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Abstract

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.

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