Forecasting Demand for Various Denominations of Notes and Coins Using Error Correction Models

Abstract

In this paper we present a set of error correction models in order to forecast separately the change in demand for each of the notes and coins issued by Norges Bank. Such forecasts can play a role in planning how many new banknotes and coins Norges Bank should order from its producers. The explanatory variables upon which we condition the forecasts inculde: households’ point of sales consumption, the number of EFTPOS terminals, money market interest rate, as well as some dummies for particular events. The estimated effects seem overall to correpsond with findings by other studies. Interstingly, we find that as consumers to a larger extent use EFTPOS cards for their point of sales consumption, holdings of the lowest value denomination coin increase, something we attribute to consumers leaving stocks of low value coins at home since they are less frequently used for paying.