IMF Working Papers

Monetary Policy and Models of Currency Demand

By Mariam El Hamiani Khatat

February 16, 2018

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Mariam El Hamiani Khatat. Monetary Policy and Models of Currency Demand, (USA: International Monetary Fund, 2018) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Asset and liability management, Banking, Central bank policy rate, Commercial banks, Currencies, Financial institutions, Financial services, Liquidity, Liquidity forecasting, Money

Keywords: A number of central banks, Arima currency in circulation model, ARIMA model, ARIMA models, Bank reserves, Banking system, Central bank policy rate, CIC model, Commercial banks, Currencies, Currency demand, Currency in circulation, Currency in circulation model, FX operation, Interest rate, Liquidity, Liquidity forecasting, Maghreb, Monetary policy, Monetary policy shock, Moroccan dirham, Net foreign assets, Policy rate change, Seasonality, WP

Publication Details

  • Pages:

    55

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2018/028

  • Stock No:

    WPIEA2018028

  • ISBN:

    9781484341926

  • ISSN:

    1018-5941

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