Two types of currency in circulation models are identified: (1) a first generation derived from
the theory of money demand and (2) a second generation aimed at producing daily forecasts
of currency in circulation. In this paper, we transform the currency demand function into a
VAR to capture the dynamic link between interest rates and the demand for cash. We also
apply ARIMA modeling to forecast the daily currency in circulation for Brazil, Kazakhstan,
Morocco, New Zealand, and Sudan. Our empirical work shows that some of the conclusions
in the economic literature on the impact of interest rates on the demand for currency do not
necessarily hold, and that central banks would benefit from running both generations of
currency in circulation models. The fundamental longer-run determinants of the demand for
cash are distinct from its short-run determinants.
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