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The demand for money in developing countries: Assessing the role of financial innovation

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Author Info
Reinhart, Carmen
Arrau, Patricio
DeGregorio, Jose
Wickham, Peter

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Abstract

Traditional specifications of money demand have been commonly plagU4:!d by persistent overprediction, implausible parameter estimates, and highly autocorrelated errors. This paper argues that some of those problems stem from the failure to account for the impact of financial innovation. We estimate money demand for ten developing countries employing various proxies for the innovation process and provide an assessment of the relative importance of this variable. We find that financial innovation plays an important role in determining money demand and its fluctuations, and that the importance of this role increases with the rate of inflation.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13691.

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Date of creation: May 1991
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Handle: RePEc:pra:mprapa:13691

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Related research
Keywords: money demand inflation interest rates technological innovation financial;

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Find related papers by JEL classification:
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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  1. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393. [Downloadable!] (restricted)
  2. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June. [Downloadable!] (restricted)
  3. Ochs, Jack & Rush, Mark, 1983. "The Persistence of Interest-Rate Effects on the Demand for Currency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(4), pages 499-505, November. [Downloadable!] (restricted)
  4. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  5. Hendry, David F & Mizon, Grayham E, 1978. "Serial Correlation as a Convenient Simplification, not a Nuisance: A Comment on a Study of the Demand for Money by the Bank of England," Economic Journal, Royal Economic Society, vol. 88(351), pages 549-63, September. [Downloadable!] (restricted)
  6. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May. [Downloadable!] (restricted)
  7. Lieberman, Charles, 1977. "The Transactions Demand for Money and Technological Change," The Review of Economics and Statistics, MIT Press, vol. 59(3), pages 307-17, August. [Downloadable!] (restricted)
  8. Stephen M. Goldfeld, 1976. "The Case of the Missing Money," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1976-3), pages 683-740. [Downloadable!]
  9. Cooley, Thomas F & Prescott, Edward C, 1973. "An Adaptive Regression Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 364-71, June. [Downloadable!] (restricted)
  10. Arrau, Patricio & de Gregorio, Jose, 1991. "Financial innovation and money demand : theory and empirical implementation," Policy Research Working Paper Series 585, The World Bank. [Downloadable!]
  11. Bhargava, Alok, 1986. "On the Theory of Testing for Unit Roots in Observed Time Series," Review of Economic Studies, Blackwell Publishing, vol. 53(3), pages 369-84, July. [Downloadable!] (restricted)
  12. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier. [Downloadable!] (restricted)
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