CEDS UNPAD

Forecasting Currency in Circulation: The Case of Indonesia

Achieving stability in the short-term interest rates (i.e., overnight interest rate) of the inter-bank money market around its policy rates, as one of the operational target of monetary policy conducted by Indonesia’s central bank (hereafter referred as Bank Indonesia), could be done through maintaining the balance of supply and demand of banking liquidity in the money market. In order to achieve efficiency and effectiveness in achieving this objective, we need a picture of bank liquidity conditions in money markets, in particular the factors that influence it, both from the demand side and supply side. In addition, Bank Indonesia, through its monetary instruments, aims at maintaining price level stability. In order to achieve this objective, it is imperative for the central bank to have an accurate estimation of the money market liquidity. However, liquidity is influenced by various autonomous factors which are not in control of the central bank. One of the significant autonomous factors influencing financial market liquidity is the amount of money (currency in circulation), which is difficult to assess because it is influenced by a variety of seasonal factors.  Currency in circulation, as the main component of Base Money, is one of the important factors affecting bank liquidity. Thus, the availability of cash projection is very important in order to improve the effectiveness of bank liquidity management. During this projected ratio of money made by Bank Indonesia has not been too satisfactory. The objective of this research is to forecast currency in circulation for the case of Indonesia on daily and weekly basis.

Discussant: Prof. Dr. Tati S. Joesron

 

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Center for Economics and Development Studies is a research center under the Department of Economics, Padjadjaran University, Indonesia. A leading research institute in Indonesia in the area of economics and development studies.
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