Short-term currency in circulation forecasting for monetary policy purposes: The case of Poland

One of the most significant factors which influences the level of banking sector liquidity is Currency in Circulation. Although the central bank is in charge of distribution of the currency it can't assess the demand for the currency, as that demand is generated by the customers of commercial banks. Therefore, the amount of Currency in Circulation has to be modelled and forecasted. This paper introduces ARIMA(2,1) and SARIMA(2,1)(5,0) models with dummy variables and discusses its applicability to the forecasting of Currency in Circulation. The forecasting performance of these models is compared. The results indicate that the performance of SARIMA(2,1)(5,0) is better and that both models might be applied for monetary policy purposes as supportive tools for banking sector liquidity forecasting.