Forecasting Currency in Circulation in Nigeria Using Holt-Winters Exponential Smoothing Method

Abstract

Nigeria is a country located in West Africa. It is the most populous country in Africa, with a population of about 211 million. Nigeria is a federal republic with three tiers of government: federal, state, and local. Nigeria is a diverse country, with over 250 ethnic groups. This study aims to investigate the forecasting of currencies in circulation (CIC) in Nigeria using the Holt-Winters exponential smoothing method (Additive Holt–Winters Model and Multiplicative Holt–Winters Method). The forecasting data are collected from January 1960 to December 2022. The focus of the study is primarily to determine the optimal forecasting approach while considering the pertinent smoothing parameters and determine which of the forecasting method, either the multiplicative Holt–Winters or additive Holt–Winters is best in forecasting CIC in Nigeria. Furthermore, the study offers prognostic insights regarding CIC in Nigeria. Three experiments were conducted with different parameters (α= 0.2, γ= 0.2, δ= 0.5; α= 0.4, γ= 0.3, δ= 0.1; α= 0.1, γ= 0.1, δ= 0.3) that were randomly generated. The experiment with α= 0.4, γ= 0.3, and δ= 0.1 parameters was the best model for forecasting the variable using both the Additive Holt-Winters model and the Multiplicative Holt-Winters method. Based on the comparison of the accuracy measures, this study concluded that the multiplicative Holt-Winters method outperforms the additive Holt-Winters model in all three measures: MAPE, MAD, and MSD. The multiplicative Holt-Winters method has a significantly lower MAPE (5.97894E+00) compared to the additive Holt-Winters model (9.55758E+02). The forecast of CIC in Nigeria was conducted using the multiplicative Holt-Winters method, and it found that currency in circulation in Nigeria continues to increase as it shows the upper trend.