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, Fathin Faizah Said

Research output: Contribution to journalArticle

1 Citation (Scopus)

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.

Original languageEnglish
Pages (from-to)177-193
Number of pages17
JournalRegional Science Inquiry
Volume9
Issue number1
Publication statusPublished - 1 Jun 2017

Fingerprint

Malaysia
money
innovation
demand
monetary policy
testing procedure
financial system
error correction
disequilibrium
evidence
effect
Money demand
Demand for money
Financial innovation
test
Payment system
Monetary policy
Payment
Payment instruments

Keywords

  • ARDL
  • Cointegration
  • Financial innovations
  • Money demand
  • Stability

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Development
  • Sociology and Political Science
  • Economics and Econometrics

Cite this

Investigating the effects of financial innovations on the demand for money in Malaysia using the ardl appoach to cointergration. / Aliha, Payam Mohammad; Sarmidi, Tamat; Shaar, Abu Hassan; Said, Fathin Faizah.

In: Regional Science Inquiry, Vol. 9, No. 1, 01.06.2017, p. 177-193.

Research output: Contribution to journalArticle

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