INVESTIGATING THE IMPACT OF NEW PAYMENT TECHNOLOGIES ON MONEY DEMAND IN INDIA USING DUMMY VARIABLE

Abstract

In this paper, we estimate a conventional money demand model with currency in circulation (M2) as dependent variable denoted by MD and gross domestic product (GDP, constant international US$), interest rate (IR) as independent variables over the period 1990- 2015. We apply Vector Error Correction Model to estimate money demand. We expect that the formation of National Payments Corporation of India (NPCI) has stimulated the development of electronic banking such as electronic clearing products including National Electronic Funds Transfer, ECS (Debit), and Card Products. Based on the estimates of a VAR system, we conclude that introducing new electronic banking following the formation of National Payments Corporation of India (NPCI) do not have a significant influence on the money demand. However, there exists a long-term equilibrium relationships between variables, and also, these variables do have influence on MD in the long run. The disparity between the value of money demand in period (t-1) and its long run equilibrium value is corrected by 56.2 percent. This means that the deviation of money demand from long run value is corrected in about 2 years. Also, there is short term causality running from GDP and IR to MD.