FINANCIAL INNOVATION AND THE DEMAND FOR MONEY: EVIDENCE FROM THE PHILIPPINES

Rik Hafer () and Ali Kutan

International Economic Journal, 2001, vol. 17, issue 1, 17-27

Abstract: This paper tests whether financial innovations in the Philippines distorted the long-run relation between real money balances, income and interest rates. Using data for the monetary base, M1 and M3 over the period 1980-1998, we cannot reject the hypothesis that there does not exist a standard money demand relation between M1 and M3, real income and interest rates. However, when we allow for the impact of financial innovations, this finding is reversed for M1. Estimates of ECM models for these measures also show that financial innovations impacted real money balances for M1, but not M3. This evidence supports the Philippine central bank's choice of a monetary aggregate as its policy instrument to achieve its policy objectives. [E41, E58]

Date: 2001
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DOI: 10.1080/10168730300080002

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