Digital payments and physical cash demand in an emerging market: Temporal asymmetry and implications for retail CBDC transition planning

As central banks explore Central Bank Digital Currencies (CBDC), empirical evidence on the cash–digital-payment dynamics relevant to retail CBDC transition planning in emerging markets remains scarce. Using monthly Indonesian data (2017–2026), this study estimates the relationship between physical currency in circulation and private e-money transaction volume as one input into that planning process, explicitly distinguishing cash-demand estimation from the broader, unobserved construct of CBDC adoption readiness. A Vector Error Correction Model within a Johansen cointegration framework estimates long- and short-run dynamics. The relationship exhibits a temporal asymmetry: short-run dynamics show no significant displacement effect, while the long-run cointegrating elasticity is positive and remains significant across lag-order, sub-sample, and structural-break robustness checks (baseline β = + 0.3295 ), consistent with complementarity rather than substitution. The policy interest rate shows a similarly asymmetric pattern: insignificant short-run/impulse-response effects but a significant negative long-run semi-elasticity ( β = − 0.1023 ), consistent with cash demand responding to interest-rate opportunity costs only over multi-year horizons. A hybrid Prophet-LSTM model constructs a 36-month baseline cash-demand projection for logistics planning; under a leakage-free, pooled rolling-origin evaluation (MAPE 2.54%), its accuracy is statistically indistinguishable from SARIMA and significantly better than standalone Prophet, standalone LSTM, and naive benchmarks. Because the estimated relationships describe cash-demand determinants rather than directly-measured CBDC adoption behavior, these findings offer an indicative, precautionary rationale – not a model-identified determination – for designing an initial Digital Rupiah as non-interest-bearing, and support using the projection for cash-management planning rather than as a CBDC rollout timeline.