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Here in New Zealand our lowest denomination coin is 10c after the 5c was removed about 10 years ago. I think generally the public is pretty happy about the move.

It's quite a common argument to remove the penny from circulation in the United States. The main argument being that pennies are expensive to produce, are virtually worthless, and tie up time when they're given as change. The argument is that they don't actually serve the purpose of currency very well in terms of easily transferring value, because their value is so small for the effort of using them.

The question I have is, what economic effect would removing the smallest denomination currency have?

Things to consider are:

  • Immediate rounding on smaller items (eg. newspapers).

  • Less piggybanking as pennies are no longer lost or stuck in collection jars.

I guess the question is whether removing lowest denomination coins has an inflationary effect.

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The practice of rounding to the smallest currency unit is called Swedish rounding. I know of a few papers that discuss likely economic concequences.

Eliminating the Penny from the U. S. Coinage System: An Economic Analysis Lombra (2001)

Time to Eliminate the Penny from the U.S. Coinage System: New Evidence Whaples (2007)

Pennies, Pricing, and Rounding: Is All the Relevant Analysis in? Lombra (2007)

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    $\begingroup$ Please can you summarise the conclusions here? We're trying to build a body of awesome content here, not just pointers to content elsewhere. $\endgroup$ – EnergyNumbers Mar 10 '15 at 14:48
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Short answer: NO, it doesn't affect inflation. Longer answer follows:

The lowest denomination coin usually stands for a very small amount of the total amount of cash. There are a lot of them, but their total worth isn't that great. In Sweden, where I live, the lowest denomination coin has been removed several times.

The currency in Sweden is called krona (crown) and has the acronym kr. 1 kr = 100 öre.

Changes in lowest denomination in Sweden (the link leads to page in swedish):

1972:  1 öre ->  5 öre
1985:  5 öre -> 10 öre
1992: 10 öre -> 50 öre
2010: 50 öre ->  1 krona

The last time, in 2010, there were around 400 million 50 öre coins in circulation with a total value of 200 million kr (around 25 million USD, or $2:50 per capita). Around 70% of those were never returned.

While we no longer have smaller cash than 1 kr, money is still charged in increments of 0.01 kr.

When you pay electronically, the exact amount is charged. When you pay with cash the amount is rounded to the nearest krona. It is possible to game the system by using a card when the amount would be rounded up and using cash when it is rounded down. However, no one seems to do that. It just isn't profitable enough to be worth your time.

Edit:

Bottom line: There doesn't seem to be any significant (measurable) effect of removing the lowest denomination coin once its value is so low that it has outlived its usefulness.

My conclusion is based partly on the low total value of the removed coins, partly on internet searches for news articles or comments relating to the change. The only noteworthy subject that came up was related to the change of deposit on soda cans from 50 öre to 1 kr in 2010 and the public response was slight confusion on whether the higher deposit would apply to cans already in circulation (which it didn't).

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