The Demand for Money in Developing Countries: Assessing the Role of Financial Innovation

40 Pages Posted: 15 Feb 2006

See all articles by Patricio Arrau

Patricio Arrau

World Bank

Jose de Gregorio

Central Bank of Chile; Universidad de Chile; National Bureau of Economic Research (NBER)

Carmen Reinhart

Harvard University - Center for Business and Government; Centre for Economic Policy Research (CEPR); World Bank; University of Maryland - School of Public Affairs; National Bureau of Economic Research (NBER); International Monetary Fund (IMF); Peterson Institute for International Economics; Harvard University, Harvard Kennedy School (HKS), Belfer Center for Science and International Affairs (BCSIA) ; Harvard University - Harvard Kennedy School (HKS)

Peter Wickham

International Monetary Fund (IMF)

Date Written: May, 1991

Abstract

Traditional specifications of money demand have been commonly plagued by persistent overprediction, implausible parameter estimates, and highly autocorrelated errors. This paper argues that some of those problems stem from the failure to account for the impact of financial innovation. We estimate money demand for ten developing countries employing various proxies for the innovation process and provide an assessment of the relative importance of this variable. We find that financial innovation plays an important role in determining money demand and its fluctuations, and that the importance of this role increases with the rate of inflation.

JEL Classification: E41, E44

Suggested Citation

Arrau, Patricio and de Gregorio, Jose and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Wickham, Peter, The Demand for Money in Developing Countries: Assessing the Role of Financial Innovation (May, 1991). IMF Working Paper No. 91/45, Available at SSRN: https://ssrn.com/abstract=884790

Patricio Arrau (Contact Author)

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Jose De Gregorio

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Universidad de Chile ( email )

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