RDP 2015-05: The Social Costs of Currency Counterfeiting 6. Conclusion

While the level of counterfeiting activity seen in Australia is relatively low, the potential costs to society from counterfeiting are non-trivial. Estimates from a structural VAR suggest that increased counterfeiting activity affects the methods of payment used by the public. The demand for banknotes is found to decline following a counterfeiting shock, consistent with a loss of confidence in the currency. The stock of bank deposits and the stock of credit card debt are found to increase, which is consistent with the public substituting cash for other payment methods.

Using separate data on the cost of making payments, we examine a scenario where cash and electronic card activity follows the response functions estimated by our structural model. This scenario suggests a total increase of A$7.0 million in social costs in response to a total increase in counterfeiting of around A$140,000 spread over a ten-year period. There is substantial statistical uncertainty surrounding the estimates and so they should be interpreted with caution. Even so, the results suggest that there are significant pay-offs from efforts to prevent and deter counterfeiting activity in Australia.