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VELOCITY OF MONEY WITHIN THE FRAMEWORK OF MONETARY TARGETING IN SIERRA LEONE

Alfred J. H. Aruna ()
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Alfred J. H. Aruna: Financial Markets Department, Bank of Sierra-Leone

West African Journal of Monetary and Economic Integration, 2016, vol. 16, issue 1, 62-96

Abstract: A pre-requisite for monetary targeting strategy is a stable money demand function, which in turn requires stability in velocity. The study investigates the impact of financial development on the velocity of money in Sierra Leone, over the time horizon 1970-2013. The method of principal components is employed to construct a Financial Sector Development index (FSD) used to proxy development in the sector. Using the Autoregressive Distributed Lag (ARDL) approach, the results confirm that financial sector growth has a significant negative relationship on income velocity in Sierra Leone. The pair-wise granger causality test reveals that there is no causality between financial development and income velocity thus underscoring the fact that Sierra Leone is still in its early stages of financial development. Money growth also Granger causes velocity of money and thus changes in the past values of money growth can be used to predict the change in the present value of velocity of money. Hence, the Friedmanite Hypothesis is verified in the case of Sierra Leone. Thus, the study recommends that the monetary authority should improve access to banking and financial services especially in rural areas as a vast majority of the rural community is financially excluded so as to improve financial development and overall economic growth.

Keywords: Income Velocity; Financial Development; Monetary Targeting Auto regressive distributed Lag LARDL (search for similar items in EconPapers)
JEL-codes: B26 C13 E40 E52 (search for similar items in EconPapers)
Date: 2016
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