INVESTIGATING THE EFFECTS OF FINANCIAL INNOVATIONS ON THE DEMAND FOR MONEY IN MALAYSIA USING THE ARDL APPOACH TO COINTERGRATION

Payam MOHAMMAD Aliha (), Tamat Sarmidi (), Abu Hassan Shaar () and Fathin Said
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Payam MOHAMMAD Aliha: Ph.D candidate, National University of Malaysia (UKM), Malaysia
Tamat Sarmidi: Associate Professor Dr. at Faculty of Economics and Management, Universiti Kebangsaan Malaysia (UKM), Malaysia
Abu Hassan Shaar: Professor Dr. at Faculty of Economics and Management, Universiti Kebangsaan Malaysia (UKM), Malaysia

Regional Science Inquiry, 2017, vol. IX, issue 1, 177-193

Abstract: Money demand function plays a vital role in monetary policy formulation. Over the years, several countries have experienced growth in financial innovation which has implications for monetary policy. This paper estimates the relationship between financial innovation and money demand in Malaysia with a focus on payment instruments (PI), payment systems (PS) and payment channels (PC) using the ARDL approach to cointegration between 2008 Q1 to 2015 Q4. This paper adopts the bounds testing procedure developed by Pesaran et al. (2001) to test the stability of the long-run money demand and determine the short-run dynamics for Malaysia. The empirical evidence points to the fact that while innovation in the Malaysian financial system have not ruled out the existence of stable long run money demand relationships as attested to by QUSUM Test, they (except for PS) fail to pass the Bound Test meaning that there is no evidence for a long-run association between variables. Therefore, for PI and PC, we cannot proceed to the next step. For PS, the estimated coefficient for the error correction term is not significant which means that there is no adjustment towards long-run equilibrium. In other words, disequilibrium between money demand and independent variables is not corrected over time and it actually diverges rather than converge.

Keywords: Money demand; Financial innovations; Stability; ARDL; Cointegration (search for similar items in EconPapers)
JEL-codes: C13 C40 C51 E40 E44 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (2)

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