Optimal banknote replenishing policy by an Issuing Bank

The minimal total cost replenishing policy for legal banknotes by the Bank of Israel (a ‘Federal’ Issuing Bank) was determined in three stages: (a) the market demand for banknotes of different denominations for a planning horizon of 10 years was evaluated using regression analysis; (b) the periodic supply of the banknotes to the market was estimated from the incremental market demand and the need to replace worn-out banknotes; and (c) a total cost discrete Dynamic Programming model was constructed to find the optimal ordering quantities of banknotes, under the constraints of maximal storage and maximal order size capacities.