Effect of Financial Innovations on Demand for Money in Pakistan: An ARDL approach

Abstract

An increasing array of development of banking system of Pakistan, through the use of information technology and modernization of products and services has led to financial innovations to be considered as important determinant of demand for money. This paper investigates the relationship of financial innovations and demand for money in Pakistan using Pesaran and Shin (1995) ARDL approach for long run and ECM for short run determination using yearly observations from 1957 to 2008. Using the ARDL coefficient estimation approach financial innovations demonstrates positive relationship, not found to significant but highly elastic and does not have deterministic trend for long run estimation whereas positively significant and deterministic trend for money demand function in short run in case of Pakistan.

Keywords

• Financial Innovations
• Demand for Money
• Autoregressive Distribution Lag Model
• Error Correction Model
• Rate of Interest
• Rate of Inflation
• GDP