Financial Innovations and Money Velocity in Uganda

Abstract

This paper investigates the impact of financial innovations on the stability of money velocity. The paper contributes to the existing literature in three ways; first, we develop a simple analytical framework for money velocity taking into account the effect of financial innovations. Second, we test the model on Ugandan time series data using the ARDL bounds testing approach. Third, we check for the stability of the long-run money velocity function. Results show significant negative and positive effects of financial innovations on the money velocity in the short and long run, respectively. In addition, the long-run money velocity equation is stable despite the financial innovations that have evolved over time. Furthermore, other macroeconomic determinants of money velocity, including real income, the 91-day treasury bill rates, inflation expectations and the exchange rate exhibited a significant and positive long-run relationship with money velocity except for real income. These results suggest that financial innovations have not altered the long-run stability of money velocity in Uganda. Thus, given the importance of financial innovations in enhancing the access to financial services, we recommend that more technological advances and diversification of financial products should be enhanced so as to improve financial sector development and overall economic growth.

Macroeconomic effects of Mobile money: evidence from Uganda

“…They found that the rapid pace of financial innovation during the period 1998-2013 did not distort the equilibrium of the money demand function. Nampewo and Opolot (2016) examined the impact of financial innovations on money velocity in Uganda. They were primarily interested in determining whether money velocity was still important in the inflation-targeting regime.…”

“…According to Simpasa and Gurara (2012), who first discussed the possible inflationary effects of mobile money, the inflationary effect is probable if, as evidenced by our results, mobile money does not lead to an improvement in economic activity (GDP). If mobile money greatly serves to facilitate transactions, and not the creation of added value, then it might serve to increase money velocity, as discussed by Nampewo and Opolot (2016).…”

“…Moreover, mobile money will obviously increase the velocity of money in circulation because it reduces the time and transaction costs of making retail payments. Indeed, innovations in the financial sector, including mobile money, have been shown to have statistically significant positive long-term effects on money velocity in Uganda (Nampewo and Opolot 2016).…”

The Interaction Effect of Financial Innovation and the Transmission Channels on Money Demand in Uganda

“…However, as the authors admit, differences in the types of financial innovations across African countries suggest that there is need to use country case studies to investigate the effect of financial innovation on money demand rather than relying on grouped countries. Nampewo and Opolot (2016) contributes to the ongoing debate by investigating the impact of financial innovations on the stability of money velocity using quarterly data for the period 2000-Q1 to 2013-Q4. Using the ARDL estimation framework, the authors find significant negative and positive effects of financial innovations, proxied by the ratio of currency in circulation to broad money, and ratio of time deposits to demand deposits, on the money velocity in the short and long-run, respectively.…”

“…The current paper aims at providing a The current paper specifically examines two policy questions: First, we investigate the direct role of financial innovations in the demand for real money demand measured as real narrow money, M1, and then as real broad money, M2. Unlike Nampewo and Opolot (2016), the focus of the current paper is on real money demand rather than velocity of money. Note that the first measure of narrow money balances is dominant in developing countries (as in Mark & Sul, 2003;Iyoboyi & Pedro, 2016;Rao & Kumar, 2009;and Salisu et al, 2013), justified by the argument that it would give good insights about a country like Uganda where alot of people do not have bank accounts, and the few hardly save because of the highly subsistence lifestyles and the high marginal propensity to consume.…”