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The Demand for Money in Developing Countries: Assessing the Role of Financial innovation

  • Jose De Gregorio
  • Peter Wickham
  • Patricio Arrau
  • Carmen Reinhart

Traditional specifications of money demand have been commonly plagued 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 International Monetary Fund in its series IMF Working Papers with number 91/45.

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Length: 40
Date of creation: 01 May 1991
Date of revision:
Handle: RePEc:imf:imfwpa:91/45
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  27. Arrau, Patricio & De Gregorio, Jose, 1993. "Financial Innovation and Money Demand: Application to Chile and Mexico," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 524-30, August.
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