Forecasting Euro Banknotes in Circulation with Structural Time Series Models in Times of the COVID-19 Pandemic

As part of the Eurosystem’s annual banknote production planning, the national central banks draw up forecasts estimating the volumes of national-issued banknotes in circulation for the three years ahead. As at the end of 2021, more than 80 per cent of euro banknotes in circulation (cumulated net issuance) had been issued by the national central banks of France, Germany, Italy and Spain (collectively referred to as the “4 NCBs”). To date, the 4 NCBs have been using ARIMAX models to forecast the banknotes issued nationally in circulation by denomination (“benchmark models”). This paper presents the structural time series models developed by the 4 NCBs as an additional forecasting tool. According to the forecast accuracy measures employed, the Structural Time series Models (“STSMs”) outperform the benchmark models at each of the 4 NCBs and for most of the denominations. However, it should be borne in mind that the statistical informative value of this comparison is limited by the short projection period of just 12 months