Tag: C13

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

Payam MOHAMMAD ALIHA

Ph.D candidate, Universiti Kebangsaan Malaysia (UKM), Malaysia

payammaliha@gmail.com

Tamat SARMIDI

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

tamat@ukm.edu.my

Fathin FAIZAH SAID

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

fatin@ukm.edu.my

Abstract

This paper investigates the effect of financial innovation on real money demand in the United States using GARCH estimation technique between 1990 and 2016. Ratios of broad money stock to GDP and growth in net domestic credit to GDP were included in a conventional money demand function to account for the financial innovation. The results indicate that neither external shocks (financial innovation) nor internal shocks (previous years’ information) influence the volatility of the money demand.

Keywords: money demand, ARCH/GARCH, financial innovation, internal/external shock

JEL classification: C13, C40, C51, E40, E44
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PAYMENT TECHNOLOGIES AND MONEY DEMAND: EVIDENCE FROM DYNAMIC PANEL

Payam Mohammad ALIHA

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

payammaliha@gmail.com

Tamat SARMIDI

Professor Dr. Faculty of Economics and Management, National University of Malaysia (UKM), Malaysia

tamat@ukm.my

Abu Hassan SHAARI

Professor Dr. Faculty of Economics and Management, National University of Malaysia (UKM), Malaysia

ahassan@ukm.my

Fathin Faizah SAID

Professor Dr. Faculty of Economics and Management, National University of Malaysia (UKM), Malaysia

fatin@ukm.my

Abstract

The banking system has experienced rapid and significant technological changes in recent years, including automated teller machines (ATMs), automated clearing houses, point of sale systems, telephone transfers, automatic bill payer accounts, and credit cards. The total effect of these innovations on money demand has been the subject of some empirical research; however, the individual effect of most of these innovations has not been estimated. This article attempts to partially bridge the gap in the empirical literature by providing empirical evidence relating to the effect of ATMs on money demand in world scale. The demand for money is a very important for the conduct of monetary policy and measurement of the effectiveness of monetary policy. This study attempts to analyse if financial innovations has impacted the demand for money using a system (the original equation and the transformed one) GMM method. In this study, money demand dynamics are examined empirically by using the Blundell–Bond estimator which reinforces Arellano–Bond by making an additional assumption that first differences of instrument variables are uncorrelated with the fixed effects. It makes it possible to introduce more instruments that improve the efficiency considerably. We estimate the demand for money (M2) for a panel of 215 countries and territories from 2004 to 2013. The elasticity of the demand for real money to ATM is about 0.01 percent meaning that the sensitivity of money demand to ATM is low. In other words, money demand is not elastic with regard to ATM.

Keywords: Money demand, ATM, Financial innovation, Dynamic panel data model, GMM

JEL classification: C13, C40, C51, E40, E44

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INVESTIGATING THE EFFECTS OF FINANCIAL INNOVATIONS ON THE DEMAND FOR MONEY IN MALAYSIA USING THE ARDL APPOACH TO COINTERGRATION

Payam MOHAMMAD ALIHA

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

payammaliha@gmail.com

Tamat SARMIDI

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

tamat@ukm.edu.my

Abu Hassan SHAAR

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

ahassan@ukm.edu.my

Fathin FAIZAH SAID

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

fatin@ukm.edu.my

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.

Keywords: Money demand, Financial innovations, Stability, ARDL, Cointegration

JEL classification: C13, C40, C51, E40, E44

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