A Different Approach to CIC Forecasting

Forecasting cash in circulation (CIC) is a key activity of central banks as it is an important variable in monetary policymaking, affecting overall liquidity in the economy and guiding their currency issuance operations.

The Bangko Sentral ng Pilipinas (BSP) has issued a working paper looking at a balance sheet approach to forecasting CIC ¹.

Cash cycle

The paper starts by explaining the cash cycle and the need to estimate currency requirements by denomination based on currency management indicators and the prevailing macroeconomic conditions. It identifies four motives for demanding cash: 

• Transactions – Positively related to economic activity.

• Opportunity costs – High inflation and/or interest rates reduce demand for cash.

• Precautionary motive – Uncertainty and reduced appetites for risk reduce the demand for cash.

• Other – For example, older people use more cash.