The nexus between financial innovations and velocity of money: Evidence from Namibia
Loading...
Date
2022
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
University of Namibia
Abstract
The study of the velocity for money in an economy is a central issue in central bank
policy formulation. This is so because a steady demand for money function is vital for
the conduct of effective monetary policy. The study investigated the relationship between
financial innovations and the velocity of money in the Namibian economy. Secondary
data from the World Bank and Bank of Namibia, covering the period 2000 to 2020. The
study relied on the Autoregressive Distributed Lag Model technique to test the
relationship. The founding objectives were named to explore whether financial
innovation explained the velocity of money and secondly whether there existed a short run or a long-run relationship between the selected variables. The results indicate that
financial innovations explain the velocity of money in the economy, and the Error
Correction model determined that there was an existent long-run relationship between
the variables. The margin of the inverse relationship was evident from the coefficient of -
1.107354, meaning that an increase by one unit change in financial innovation caused a
-1.107354 decrease in the velocity of money in the economy. Hence, the study found that
both in the short-run and long-run financial sector innovations are inseparably linked
with the velocity of money. The model also included two control variables GDP and the
opportunity cost of holding money as the theoretical foundation nominate the two
variables to also affect money demand which eventually affects velocity of money. The
results found that a positive relationship existed between the GDP variable and velocity
of money and the magnitude effect of the relationship is shown by the coefficient. The
other variable opportunity cost of holding money was found to be statistically
insignificant as showed the probability and the t-statistic. From these results, a
cautionary advice would be extended to the policymakers to manage this dynamic
relationships better as it has a bearing on the monetary policy framework in the case of
the velocity of money (money demand function) in an economy
Description
A thesis submitted in partial fulfilment of the requirements for the degree of master in business administration- Finance
Keywords
Financial Innovations, Velocity of money, Namibia, Central bank policy formulation, World Bank, Bank of Namibia