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Economic Quarterly

Fall 2007

Currency Quality and Changes in the Behavior of Depository Institutions

Hubert P. Janicki, Nashat F. Moin, Andrea L. Waddle and Alexander L. Wolman

Federal Reserve Banks distribute currency to—and accept deposits from—depository institutions. Currency that the Federal Reserve distributes is either newly printed by the Bureau of Engraving and Printing, or previously deposited by banks. Currency that banks deposit with the Fed is sorted for fitness, and notes which are unfit are destroyed. The Fed is in the midst of implementing changes to its policy for deposits and withdrawals, and those changes are expected to cause banks to deposit less currency with the Fed. We describe a model for analyzing the effects of reduced deposit rates on the quality of currency in circulation, and use the model to study changes in shred policy that would reverse any incipient changes in currency quality.

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