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Eliminating the US Penny: An Updated Economic Study

Eliminating the US Penny: An Updated Economic Study. Jordon Grimm. Introduction. How is Money Made? Why does Currency Denomination Matter? Recent Legislation. Previous Literature. Chen (1976) Removal of demanded units of currency will be inflationary Lombra (2001)

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Eliminating the US Penny: An Updated Economic Study

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  1. Eliminating the US Penny:An Updated Economic Study Jordon Grimm

  2. Introduction • How is Money Made? • Why does Currency Denomination Matter? • Recent Legislation

  3. Previous Literature • Chen (1976) • Removal of demanded units of currency will be inflationary • Lombra (2001) • US penny should remain in circulation • Chande & Fisher (2003) • Canadian penny should be eliminated

  4. Plan of Analysis • Two Questions must be answered • 1. Does the penny need to be eliminated? • 2. If so, what happens after it is removed? • If satisfactory answers for both questions are found, then the penny should be taken out of circulation.

  5. Why Remove the Penny? • Inflation  Diminishing value • Negative Seigniorage for the US Mint

  6. Seigniorage Table 1 (all monetary figures in $) (Source: US Mint Annual Reports)

  7. Why Remove the Penny? • International Comparison (Source: Wikipedia – Currency)* Eurozone includes France, Germany, Italy, Spain ** 1 and 5 won coins extremely rare; prices are rounded to the nearest 10 won in S. Korea *** 1 cent removed from circulation November 2005

  8. Why Keep the Penny? • Inflationary Effect on Economy • Impact on Charities • Historical Significance • Questions about cash transactions post-elimination

  9. Post-Elimination • Most popular plan: Rounding Scheme • Cash transactions only • After sales tax

  10. Debate over Rounding • Lombra (2001) : Rounding hurts consumers by potentially $600m/yr • Chande & Fisher (2003) : When sales tax is considered, net effect of rounding approaches zero

  11. Effect of Rounding

  12. Case Study • New Zealand • Removed 1- and 2-cent coinage in 1990 • No Evidence of Resulting Inflationary Effects • Many Firms Favored Consumers in Rounding

  13. Conclusion • Sufficient Arguments for Removing the Penny • Rounding Scheme will have Little or No Negative Economic Impact • Therefore, the Penny should be eliminated.

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