Research and policy note RPN 6-19 : December 2019 : Forecasting Currency in Circulation for the Maldives

Abstract

Currency in circulation (CIC) is the amount of cash held by the public and the banking sector. The importance of forecasting CIC stems from central banks’ remit to manage the operational target in order to achieve price stability through the management of the banking sector’s liquidity. Given the autonomous nature of CIC, daily movements can greatly impact the liquidity of the banking system that is beyond the control of the central bank and therefore, requires strenuous effort to produce short-term forecasts. The main aim of this paper is to produce a short-term forecasting model CIC in the Maldives which can be used to assess the short-term impact of Rufiyaa liquidity. Various models have been used in the literature to forecast CIC, ranging from structural models to models based on transactional and portfolio demand for cash. However, autoregressive integrated moving average (ARIMA) models are often used by central banks for its relative accuracy in shortterm forecasting. JEL classification: E41, E42, E58, E47, C22 Keywords: Currency in circulation, ARIMA, Time series forecasting, Maldives