Cash in circulation and inflation in Morocco: Causality and economic impact

This paper examines whether changes in cash in circulation contain predictive content for inflation in Morocco, and whether inflation itself feeds back into cash demand, during a period marked by major shocks (2017M01–2023M09). Using monthly data from official sources on currency outside banks, the consumer price index (CPI), the policy rate, and international oil prices, we estimate an Autoregressive Distributed Lag model in its Unconstrained Error-Correction (ARDL–UECM) form, which accommodates mixed integration orders and separates short-run dynamics from long-run adjustment. Lag orders are selected by the Akaike Information Criterion, and inference is based on HAC (Newey–West) standard errors. Bounds testing indicates a stable long-run relationship in the inflation equation once monetary policy and oil prices are controlled for. Short-run cash dynamics are jointly significant in the inflation equation, implying that cash growth contains incremental information for near-term price changes. At the coefficient level, a one–percentage point increase in monthly cash growth is associated with roughly 0.08 percentage points higher monthly inflation, with the lagged cash effect statistically strongest. In the reverse direction, the cash equation does not support a long-run equilibrium relationship within the same conditioning set, but it shows very strong short-run feedback from inflation to cash growth, consistent with higher prices raising nominal transaction needs. Overall, the evidence is most consistent with bidirectional short-run interactions, with particularly strong feedback from inflation to cash, while cash remains a useful auxiliary indicator for inflation when interpreted alongside policy-rate movements and imported cost pressures. These results suggest that monitoring cash growth can add value to inflation assessment in Morocco, especially in contexts where precautionary hoarding and informal cash-intensive activity may amplify the link between nominal spending needs and currency demand; however, conclusions on the exchange-rate channel remain limited by data availability at a consistent monthly frequency.