1.

0 INTRODUCTION

During the 1990s, Brazilian represents much more than something that is
coincides with the calendar. During this period, area of study was extremely fertile,
displays a number of aspects which will continue to be analyzed for a long time to
come. The international scene at the beginning of the decade was marked by an
increasingly intensive flow of capital and technological changes, although the difficulties
associated with an unstable domestic macroeconomic environment did not allow the
Brazilian economy to participate to the full in these new movements. Furthermore, the
economic policy-makers were constantly being reminded of the success of the
emerging economies in other regions, and the path for attaining such success seemed
to be clearly marked, according to the various analysts. At the domestic level, the
growing inflation was giving rise to various anti-inflationary attempts, while a new
Constitution (promulgated in 1988) added further fiscal and social problems to an
already unsettled economic environment.
In the second half of the decade, the context was markedly different. The
stabilization of prices achieved, accompanied by relative openness to foreign trade, has
no precedent in the economic history of the country. At the macroeconomic level,
various important changes were made which facilitated access to international capital
markets and led to a new growth pattern. The purpose of the present article is to
analyze these features in the light of the adjustment process which took place in the
1990s. Some aspects evolved in line with the prescriptions of the specialized literature
on reforms in developing countries. Not everything turned out as planned or desired,
however. We consider that the reasons for this lie in factors ranging from policy design
to the economic agents perceptions of the market signals.

The problem statement of this study is how this two variable which is real
currency and international tourist arrivals affect the money demand and how the
dependent variable which is currency circulation is significance or not significance to the
international tourism arrival (INT) and grow domestics product (GDP) per capita. This
investigation was done to see how far an extent of change in international tourism
arrival and real income (GDP Per Capita) may have effect on the currency in circulation.
The main objective for this study is to determine the relationship of the factor
which is included international tourism arrival and real income (GDP Per Capita) that
affecting the currency circulation.

2.0 LITERATURE REVIEW

Sahadudheen (2012) state that, since exchange rate has a wealth effect, it could
have a direct impact on the demand for money in India. To test the existence of a long
run relationship between the determinants, Sahadudheen uses Johansen-juselius cointegration analysis. The co-integrating regression considers only the long-run property
of the model, and does not deal with the short-run dynamics explicitly.
Muhd-Zulkhibri, A. Majid (2004) argue that the money demand relationship in
Malaysia from 1974-2001 agrees with the shift in the exchange rate regime, the
initiation of liberalization of financial sector, and several of economic crises. The stability
of the money demand function had deep effect from these changes. It is support the
existence of stable long-run money demand function regardless of the various changes
and developments, but find some evidence of instability in the short-run.
Dotsey M. (1986) has done an empirical study of the demand for currency in the
United States by building an inventory model of currency demand. On inventory model,
the proportion of transactions income spent using currency is important variables to
determine the demand for currency and a number of other properties are consistent with
data which among the insignificance of the commercial paper rate in currency demand
regressions and sign patterns on coefficients in expenditure ratio equations.
Habibullah M.S., Ghaffar R.A.(1998) argue that that the income level, inflation
rate, short-term interest rate on financial assets and the convenience services
rendered by currency and demand deposits affect the demand for currency and demand
deposits. They mentioned that liabilities of commercial banks and non-bank financial
institutions only affect the public holding for currency but not demand deposits. Thus,
the instability of demand for money M1 can be taken to be due to the reduction in the
publics holding in currency rather than demand deposits.
The fluctuation of the primary commodity prices affects the income of
developing countries. (Habibullah M.S., 1987) This causes the income uncertain and
affect the behavior to holding real balances. Therefore the public behavior in money
demand is changed due to income variability.

3.0 METHODOLOGY
3.1 THE ESTIMATING MODEL- CURRENCY DEMAND MODEL
C d=f ( w1, w2 ) +e
d= 1 + 2 w 1+ 3 w 2+ e
C
d
Currency in circulation ( C )

Growth Domestic Product (Gdp) =

International Tourist Arrivals =

w1

w2

Error Term = e

Currency in circulation is the currency that is physically used to conduct transactions

between consumers and businesses rather than stored in a bank, financial institution or
central bank. Currency in circulation is part of the overall money supply, with a larger
portion of the overall supply being stored in checking and savings accounts.
Growth domestic product per capita per is gross domestic product divided by
midyear population. GDP at purchaser's prices is the sum of gross value added by all
resident producers in the economy plus any product taxes and minus any subsidies not
included in the value of the products. It is calculated without making deductions for
depreciation of fabricated assets or for depletion and degradation of natural resources.
Data are in constant local currency.
International tourist arrivals is international inbound tourists (overnight visitors) are
the number of tourists who travel to a country other than that in which they have their
usual residence, but outside their usual environment, for a period not exceeding 12

months and whose main purpose in visiting is other than an activity remunerated from
within the country visited. When data on number of tourists are not available, the
number of visitors, which includes tourists, same-day visitors, cruise passengers, and
crew members, is shown instead.
3.2 METHOD OF ESTIMATIONS
Ordinary Least-Squares Regression
Ordinary least-squares (OLS) regression is a generalized linear modelling technique
that may be used to model a single response variable which has been recorded on at
least an interval scale. The technique may be applied to single or multiple explanatory
variables and also categorical explanatory variables that have been appropriately
coded.
At a very basic level, the relationship between a continuous response variable (Y) and
a continuous explanatory variable (X) may be represented using a line of best-fit, where
Y is predicted, at least to some extent, by X. If this relationship is linear, it may be
appropriately represented mathematically using the straight line equation 'Y = + x'.
The relationship between variables Y and X is described using the equation of the line
of best fit with indicating the value of Y when X is equal to zero (also known as the
intercept) and indicating the slope of the line (also known as the regression
coefficient). The regression coefficient describes the change in Y that is associated
with a unit change in X. As can be seen from Figure 1, only provides an indication of
the average expected change (the observed data are scattered around the line), making
it important to also interpret the confidence intervals for the estimate (the large sample
95% two-tailed approximation of the confidence intervals can be calculated as 1.96
s.e. ).
In addition to the model parameters and confidence intervals for , it is useful to also
have an indication of how well the model fits the data. Model fit can be determined by
comparing the observed scores of Y (the values of Y from the sample of data) with the
expected values of Y (the values of Y predicted by the regression equation). The

difference between these two values (the deviation, or residual as it is also called)
provides an indication of how well the model predicts each data point. Adding up the
deviances for all the data points after they have been squared (this basically removes
negative deviations) provides a simple measure of the degree to which the data
deviates from the model overall. The sum of all the squared residuals is known as the
residual sum of squares (RSS) and provides a measure of model-fit for an OLS
regression model. A poorly fitting model will deviate markedly from the data and will
consequently have a relatively large RSS, whereas a good-fitting model will not deviate
markedly from the data and will consequently have a relatively small RSS (a perfectly
fitting model will have an RSS equal to zero, as there will be no deviation between
observed and expected values of Y). It is important to understand how the RSS statistic
(or the deviance as it is also known; see Agresti,1996, pages 96-97) operates as it is
used to determine the significance of individual and groups of variables in a regression
model. A graphical illustration of the residuals for a simple regression model is provided
in Figure 2. Detailed examples of calculating deviances from residuals for null and
simple regression models can be found in Hutcheson and Moutinho, 2008.