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Investigating The Effects Of Financial Innovations On The Demand For Money In Malaysia Using The Ardl Appoach To Cointergration

Author

Listed:
  • Payam MOHAMMAD ALIHA

    (Ph.D candidate, National University of Malaysia (UKM), Malaysia)

  • Tamat SARMIDI

    (Associate Professor Dr. at Faculty of Economics and Management, Universiti Kebangsaan Malaysia (UKM), Malaysia)

  • Abu Hassan SHAAR

    (Professor Dr. at Faculty of Economics and Management, Universiti Kebangsaan Malaysia (UKM), Malaysia)

  • Fathin FAIZAH SAID

    (Dr. at Faculty of Economics and Management, Universiti Kebangsaan Malaysia (UKM), Malaysia)

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.

Suggested Citation

  • Payam MOHAMMAD ALIHA & Tamat SARMIDI & Abu Hassan SHAAR & Fathin FAIZAH SAID, 2017. "Investigating The Effects Of Financial Innovations On The Demand For Money In Malaysia Using The Ardl Appoach To Cointergration," Regional Science Inquiry, Hellenic Association of Regional Scientists, vol. 0(1), pages 177-193, June.
    • Handle: RePEc:hrs:journl:v:ix:y:2017:i:1:p:177-193
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    Cited by:

    1. Payam MOHAMMAD ALIHA & Tamat SARMIDI & Fathin FAIZAH SAID, 2018. "Investigating The Effect Of Financial Innovations On The Demand For Money In Australia Using Dols And Fmols And Comparing Their Predictive Powers," Regional Science Inquiry, Hellenic Association of Regional Scientists, vol. 0(2), pages 17-30, July.
    2. Payam MOHAMMAD ALIHA & Tamat SARMIDI & Fathin FAIZAH SAID, 2018. "Investigating The Impact Of Financial Innovation On The Volatility Of The Demand For Money In The United Stated In The Context Of An Arch/Garch Model," Regional Science Inquiry, Hellenic Association of Regional Scientists, vol. 0(1), pages 19-26, June.

    More about this item

    Keywords

    Money demand; Financial innovations; Stability; ARDL; Cointegration;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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