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Investigating The Effect Of Financial Innovations On The Demand For Money In Australia Using Dols And Fmols And Comparing Their Predictive Powers

Author

Listed:
  • Payam MOHAMMAD ALIHA

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

  • Tamat SARMIDI

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

  • Fathin FAIZAH SAID

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

Abstract

In this paper we apply two different estimation methods, namely DOLS and FMOLS to estimate real demand for money in Australia with the inclusion of financial innovations. We use a conventional money demand function that was enriched with a proxy for financial innovations. This sum of the number of cheques, credit cards, charge cards, ATM and direct entry payment was included in the regression model to proxy the effect of financial innovations on the money demand. The results indicate that the estimated coefficient of TPI using DOLS is not significant yet it is highly significant using FMOLS and it bears positive sign so that 1 percent increase in TPI leads to the increase of money demand by 0.24 percent. Also, using “Root Mean Squared Error” as the benchmark for predictive power, we conclude that FMOLS is superior to DOLD when it comes to forecasting.

Suggested Citation

  • Payam MOHAMMAD ALIHA & Tamat SARMIDI & Fathin FAIZAH SAID, 2018. "Investigating The Effect Of Financial Innovations On The Demand For Money In Australia Using Dols And Fmols And Comparing Their Predictive Powers," Regional Science Inquiry, Hellenic Association of Regional Scientists, vol. 0(2), pages 17-30, July.
    • Handle: RePEc:hrs:journl:v:x:y:2018:i:2:p:17-30
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    References listed on IDEAS

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    2. Courage Mlambo and Steven Kayambazinthu Msosa, 2020. "The Effect of Financial Technology on Money Demand: Evidence from Selected African States," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 366-373.

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    More about this item

    Keywords

    financial innovations; money demand; dynamic OLS; fully modified OLS; forecast;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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