Monetary Policy and Models of Currency Demand

Mariam El Hamiani Khatat

No 2018/028, IMF Working Papers from International Monetary Fund

Abstract: Two types of currency in circulation models are identified: (1) a first generation derived from the theory of money demand and (2) a second generation aimed at producing daily forecasts of currency in circulation. In this paper, we transform the currency demand function into a VAR to capture the dynamic link between interest rates and the demand for cash. We also apply ARIMA modeling to forecast the daily currency in circulation for Brazil, Kazakhstan, Morocco, New Zealand, and Sudan. Our empirical work shows that some of the conclusions in the economic literature on the impact of interest rates on the demand for currency do not necessarily hold, and that central banks would benefit from running both generations of currency in circulation models. The fundamental longer-run determinants of the demand for cash are distinct from its short-run determinants.

Keywords: WP; interest rate; monetary policy; banking system; Currency in circulation; ARIMA models; seasonality; liquidity forecasting; ARIMA model; currency demand; Arima currency in circulation model; FX operation; net foreign assets; a number of central banks; CIC model; policy rate change; bank reserves; Moroccan dirham; monetary policy shock; currency in circulation model; Currencies; Central bank policy rate; Liquidity; Commercial banks; Maghreb (search for similar items in EconPapers)
Pages: 55
Date: 2018-02-16
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Citations: View citations in EconPapers (5)

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