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The demand for money in developing countries : assessing the role of financial innovation

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  • Arrau, Patricio
  • De Gregorio, Jose
  • Reinhart, Carmen
  • Wickham, Peter

Abstract

Traditional specifications of money demand have commonly been plagued by persistent overprediction, implausible parameter estimates, andhighly autocorrelated errors. The authors argue that some of these problems stem from the failure to account for the impact of financial innovation. They estimate money demand for ten developing countries, using various proxies for financial innovations. They also assess the relative importance of this variable, finding financial innovation can be better modeled as a stochastic (random-walk) trend rather than a deterministic (time) trend. Financial innovation plays an important role in determining fluctuations of the demand for money. The importance of this role increases with the rate of inflation.

Suggested Citation

  • Arrau, Patricio & De Gregorio, Jose & Reinhart, Carmen & Wickham, Peter, 1991. "The demand for money in developing countries : assessing the role of financial innovation," Policy Research Working Paper Series 721, The World Bank.
    • Handle: RePEc:wbk:wbrwps:721
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    Keywords

    Economic Theory&Research; Environmental Economics&Policies; Fiscal&Monetary Policy; Inequality; Energy and Environment;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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