Page 93 - Special Topic Session (STS) - Volume 4

STS566 Iluminada T. Sicat

Currency demand forecasting:
The Philippine experience
Iluminada T. Sicat
Bangko Sentral ng Pilipinas, Currency Management Sector
Manila, Philippines

Abstract
One of the functions of Central Banks (CBs) is to issue currency to ensure that
that there will be ample note and coin to support, on time and in the
denomination required, the transaction payment needs of the economy,
including sufficient inventory to cover spikes in demand due to cyclical factors,
unexpected shocks or delay in currency production. In this respect, many CBs
have developed econometric models to estimate their currency demand using
factors such as economic, financial, and demographic and other explanatory
variables as determinants. A forecast that results to over-estimation of
currency demand could exert pressure on CB resources (particularly budgetary
allocation for currency printing/minting, vault capacity, among others).
However, an underestimation of currency forecast has far more serious impact
since this may pose reputational risks on the CB by compromising the
country’s clean note and coin policy in the short-run to serve the economy’s
currency requirement. Hence, the optimum econometric currency model is
one that minimizes forecast error (i.e., difference between actual and forecast
currency demand). In the case of the Philippines, its currency demand equation
models have evolved over time with the view to capture structural changes in
the economy, thus improve the forecasting model’s robustness, reliability and
goodness of fit.

Keywords
currency order, currency in circulation, forecast performance, buffer stock,
mean absolute percent error

1. Introduction
The Bangko Sentral (BSP) is the agency in-charge of maintaining monetary
and financial stability, and a safe and efficient payment and settlement system.
In line with these mandates, one of its functions involves currency issue.
Maintaining the value and confidence on the Philippine currency is a key part
of its responsibility. In keeping with this responsibility, the BSP has to ensure
that there is sufficient supply of good quality notes and coins to support the
requirement of the economy and facilitate financial transactions. Failure to
supply sufficient volume of required currency may hamper payment and
settlement transactions, thereby adversely affect economic activity, or worsen

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