INVESTIGATING THE EFFECT OF FINANCIAL INNOVATIONS ON THE DEMAND FOR MONEY IN AUSTRALIA USING DOLS AND FMOLS AND COMPARING THEIR PREDICTIVE POWERS

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

Regional Science Inquiry, 2018, vol. X, issue 1, 47-61

Abstract: In this paper we apply two different estimation methods, namely DOLS and FMOLS to estimate real demand for money in Australia with the inclusion of financial innovations. We use a conventional money demand function that was enriched with a proxy for financial innovations. This sum of the number of cheques, credit cards, charge cards, ATM and direct entry payment was included in the regression model to proxy the effect of financial innovations on the money demand. The results indicate that the estimated coefficient of TPI using DOLS is not significant yet it is highly significant using FMOLS and it bears positive sign so that 1 percent increase in TPI leads to the increase of money demand by 0.24 percent. Also, using "Root Mean Squared Error" as the benchmark for predictive power, we conclude that FMOLS is superior to DOLD when it comes to forecasting.

Keywords: financial innovations; money demand; dynamic OLS; fully modified OLS; forecast (search for similar items in EconPapers)
JEL-codes: E41 E42 E52 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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Journal Article: INVESTIGATING THE EFFECT OF FINANCIAL INNOVATIONS ON THE DEMAND FOR MONEY IN AUSTRALIA USING DOLS AND FMOLS AND COMPARING THEIR PREDICTIVE POWERS (2018)
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