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Assessing the nexus between mobile financial service usage and inflation – evidence from Bangladesh

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  • Ehsan, Zaeem-Al

Abstract

This paper set out to uncover the nexus between the propensity of mobile financial service (MFS) usage and inflation in Bangladesh, if any. This paper hypothesizes that the usage of MFS will lead to an increase in the velocity of money, i.e., the ease of using MFS in lieu of cash will lead to money transferring ownership quicker. All things constant, this will lead to inflation—as stipulated by the quantity theory of money. To this end, monthly data pertaining to the general price index, number of MFS agents, number of average daily MFS transactions, number of MFS clients and number of banks supporting MFS transactions have been used ranging from FY16 to FY20, subject to availability. The objective of the paper was to understand the relationship between usage of MFS and inflation, if any. To this end, two models were developed and subsequently tested. Upon undertaking a Johannsen co-integration test, it was found that there is indeed one long run equilibrium relationship between the variables used as per the second model. The use of the Vector Auto Regression (VAR) on model 1 failed to upholster the hypothesis of the paper. The subsequent use of a Vector-Error Correction model (VECM) on model 2 to capture the nexus between the propensity of MFS usage and inflation in Bangladesh also failed to diagnose a statistically significant relationship between MFS velocity and inflation in Bangladesh.

Suggested Citation

  • Ehsan, Zaeem-Al, 2021. "Assessing the nexus between mobile financial service usage and inflation – evidence from Bangladesh," MPRA Paper 110528, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:110528
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    References listed on IDEAS

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    1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    2. Milton Friedman, 1971. "A Theoretical Framework for Monetary Analysis," NBER Books, National Bureau of Economic Research, Inc, number frie71-1, January.
    3. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
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    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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