THE EFFECT OF FINANCIAL INNOVATION ON MONEY DEMAND IN UGANDA: AN EXAMINATION OF NEW PAYMENT TECHNOLOGIES ON DEMAND FOR NARROW MONEY
Date
2014-03-06
Authors
NAKAMYA, MIRIA
Journal Title
Journal ISSN
Volume Title
Publisher
Makerere University
Abstract
Since the liberalization of Uganda’s financial sector in the early 1990s, both foreign and local
investors have been attracted to the sector. Competition and development; particularly
technological development resulted in the introduction of new payment technologies such as
ATM cards, Electronic Funds Transfers (EFTs), Real Time Gross Settlement (RTGS), Internet
Banking, use of visa and debit cards and now mobile money transfers. These would ordinarily
lead to either an increase of decrease in demand for money. Their effect on demand for money in
Uganda has not been studied. In this regard, it is imperative to investigate the effect that these
payment technologies have on demand for narrow money.
In particular, this study assesses the effect of the number of automated teller machines (ATMs)
and the volume of Electronic Funds Transfer (EFTs) on demand for narrow money (M1).
Monthly aggregated data from June 2003 to March 2011 was used and a Johansen Juselius
approach to cointegration was applied. In the longrun model, it is established that income has a
positive effect on demand for narrow money. The opportunity cost variables of interest rate on
the 90-days Treasury bill and expected inflation indicated a negative effect on demand for
money. The Treasury bill rate, however, had a very smaller coefficient suggesting that the
interest rate channel is still a weak monetary transmission channel. Proxy variables for payment
technology innovations, that is, ATMs and EFTs have positive and significant effects on demand
for M1. This emphasizes the need to take into account the effect of financial innovation in
money demand estimation and when formulating monetary policies in the economy. The model
was well specified basing on the results from the Ramsey Reset test, and the CUSUM and
CUSUMSQ did not reveal any sign of model instability. It is recommended that for sound
monetary policies, the monetary authority should consider the effect of financial innovation on
demand for money.
Description
Keywords
Demand for money , financial innovation , monetary policy , Cointegration , Error Correction Model