EclectEcon

EclectEcon welcomes Greg Mankiw to the "Ban the Penny" movement.

A growing number of experts are concluding the penny is too picayune to bother with. "The purpose of the monetary system is to facilitate exchange, but the penny no longer serves that purpose," says Harvard professor Gregory Mankiw, a former chairman of President Bush's Council of Economic Advisers. "When people start leaving a monetary unit at the cash register for the next customer, the unit is too small to be useful."

Tyler Cowen agrees, but wonders about the effect on the sales tax, which puzzles me. As it is, the sales tax is rounded to the nearest penny, so why not just round it to the nearest nickel (or preferably get rid of the nickel, too, and round everything to the nearest dime)?
I've written considerably on this topic for nearly two decades.

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• or see here.

[h/t to The Emirates Economist]

In a follow-up post, Tyler Cowen predicts prices would go up if the US or Canada banned the penny (or one-cent coin). I'm not so sure, and I don't know the evidence from Australia or New Zealand, where indeed the penny was removed circulation (along with two-cent coins) over a decade ago. My argument in favour of banning the penny is that I'd rather pay a few extra cents and be freed from the nuisance of pennies.

But another consideration is that in Australia, prices are still denominated in hundredths of a dollar, as in $8.98. Then the rounding occurs after all the items are added up. In this case, there's no reason at all for prices to change.