INVESTIGATING THE RELATIONSHIP BETWEEN FINANCIAL INNOVATION AND MONEY DEMAND IN MALAYSIA: AN ARDL APPROACH TO CO-INTEGRATION

Abstract

Given the recent financial innovation developments in Malaysia, we are eager to find out if the demand for money is still stable. Given that there has been no previous study on money demand in Malaysia with a focus on different systems and using the most recent data, this paper contributes to the relevant literature by estimating the Malaysian money demand including financial innovation proxies in three different systems: payment instrument (credit card, charge card, debit card, e-money), payment system (RENTAS, Interbank GIRO, FPX and Debit Card) and payment channel (ATM, Mobile Banking, Internet Banking). The relationship between these new innovations and money demand will be investigated one by one. In this paper, we will attempt to answer key questions as follow: 1) if demand for money in Malaysia is stable, 2) if it is stable, estimating short-run and long-run coefficients of the variables that are used as proxies for the financial innovations, and 3) obtaining the speed of adjustment towards long-run equilibrium. The results indicate that only two of these financial variables (charge card, FPX and Direct Debit) for whome the error correction term was negative and significant have a positive and significant impact on the demand for money in the long-run.