Money demand in Indonesia and its forecasting to 2033

Abstract

This study aims to identify the key factors driving money demand in Indonesia and to provide forecasts extending through 2033. The research employs a dual-method approach, combining time series econometric techniques with machine learning models, analyzing data from the first quarter of 2010 (2010Q1) to the fourth quarter of 2023 (2023Q4). The findings reveal that, in the long run, money demand in Indonesia is primarily influenced by Gross Domestic Product (GDP) and Financial Institution Depth (FID). In the short run, significant factors include interest rates, inflation rates, lagged values of GDP and FID, as well as access to electricity. Forecasts indicate a positive growth trajectory for money demand, which is expected to reach IDR 16,855,845 billion by 2033. This outcome highlights the continued relevance of physical currency within Indonesia’s economy. Based on these insights, the study provides valuable guidance for policymakers to effectively manage money demand by focusing on variables that can either stimulate or suppress it. The optimistic forecast further emphasizes the crucial role of money demand in maintaining Indonesia’s economic stability in the coming years.