Financial Innovation in Sierra Leone: Is the Money Demand Still Stable?
- 1 Research Department, Bank of Sierra Leone, Freetown, Sierra Leone
- 2 Research Department, Bank of Sierra Leone, Freetown, Sierra Leone
- 3 Research Department, Bank of Sierra Leone, Freetown, Sierra Leone
Abstract
This study seeks to examine the stability of the money demand function in Sierra Leone taking into account financial innovation and structural break for the period 1980 to 2016 using the autoregressive distributed lag (ARDL) framework. The empirical results show that there is a unique cointegrated and stable long-run relationship among real broad money and its determinants. The estimated results also revealed that in the long-run, financial innovation, real income, inflation rate and exchange rate significantly impact real money balances in Sierra Leone. Specifically, financial innovation has a negative relationship with real money balances. This implies that financial innovation is crucial in explaining money demand in Sierra Leone, given that financial innovations are becoming more prominent in aiding financial intermediation. In the short-run, only financial innovation and inflation have an impact on real money balance. All the other variables in the model are not statistically significant. Finally, the CUSUM and CUSUMSQ tests revealed that demand for real money balances in Sierra Leone is stable, despite the inclusion of financial innovation and accounting for structural break.
- Arrau, P., & Gregorio, J. (1991). Financial Innovations and Money Demand: Theory and Empirical Implementation. Policy Research Working Papers Series No. 585. The World Bank.
- Arrau, P., De Gregorio, J., Reinhart, C., & Wickham, P. (1995). The Demand for Money in Developing Countries: Assessing the Role of Financial Innovation. Journal of Development Economic, 46, 317-340. https://doi.org/10.1016/0304-3878(94)00066-L
- Bahmani-Oskooee, M., & Brooks, T. J. (1999). Bilateral J-Curve between US and Her Trading Partners. Weltwirtschaftliches Archiv, 135, 156-165. https://doi.org/10.1007/BF02708163
- Bahmani-Oskooee, M., & Rehman, H. (2005). Stability of the Money Demand Function in Asian Developing Countries. Applied Economics, 37, 773-792. https://doi.org/10.1080/0003684042000337424
- Bathalomew, D., & Kargbo, S. M. (2009). Exchange Rates and Monetary Dynamics in Sierra Leone: Evidence from a Modified Money Demand Function. Journal of Monetary and Economic Integration, 9, 114-133.
- Deckle, P., & Pradhan, M. (1997). Financial Liberalization and Money Demand in ASEAN Countries: Implications for Monetary Policy. Working Paper No. WP/97/36, International Monetary Fund. https://doi.org/10.5089/9781451845419.001
- Dunne, J. P., & Kasekende, E. (2016). Financial Innovation and Money Demand: Evidence from Sub-Saharan Africa. Working Paper No. 583, Economic Research Southern Africa.
- Engle, R. F., & Granger, C. W. J. (1987). Co-Integration and Error Correction: Representation, Estimation and Testing. Econometric, 55, 251-276. https://doi.org/10.2307/1913236
- Fisher, I. (1911). The Purchasing Power of Money: Its Determination and Relation to Credit, Interest and Crisis. Macmillan.
- Friedman, M. (1956). The Quantity Theory of Money: A Restatement. In M. Friedman (Ed.), The Optimum Quantity of Money (pp. 3-41), Aldine Publishing Company.
- Hossain, A. A. (2007). The Narrow Money Demand Behavior in Indonesia, 1970-2005. ASEAN Economic Bulletin, 24, 320-338. https://doi.org/10.1355/AE24-3C
- Kallon, K. M. (1992). The Demand for Money in Sub-Saharan Africa: Evidence from Sierra Leone. Journal of African Finance and Economic Development, 1, 59-76.
- Kallon, K. M. (2009). The Demand for Money in Sierra Leone Revisited. Journal of African Development, 11, 41-59. https://doi.org/10.5325/jafrideve.11.1.0041