The effects of financial innovations on money demand in Kenya.

Abstract

The objective of this study is to analyze the effects of financial innovation on money demand in Kenya for the period 2000 - 2012. The country witnessed tremendous growth in the financial sector, with innovations in transaction technology such as Mobile phone money transfer, Automated Teller Machines (ATMs), and agency-banking revolutionizing the payments landscape. The use of monetary policy as a tool for macro-economic stabilization depends largely on the behaviour of money demand thus a study on the effects of innovations on money demand is of paramount importance. This study will examine the impact of innovations on money demand using Augmented Dickey Fuller and Phillip-Perron test to establish the order of integration of the variables, Johansen Maximum Likelihood test to establish the existence of co-integration and the number of co-integrating equations among the variables in the models. Error Correction model will be used to examine the relationship among the variable. Published quarterly secondary data extracted from the Kenya National Bureau of Statistics (KNBS) and Central Bank of Kenya (CBK) database will be used

The objective of this study was to analyze the effects of financial innovation on money demand in Kenya for the period 2000 - 2012. The country witnessed tremendous growth in the financial sector, with innovations in transaction technology such as Mobile phone money transfer, Automated Teller Machines (ATMs), and agency-banking revolutionizing the payments landscape. The use of monetary policy as a tool for macro-economic stabilization largely depends on the behaviour of the demand for money thus study of effects of innovations on money demand is of paramount importance. This study examined the impact of innovations on money demand used Augmented Dickey Fuller and Phillip-Perron test to establish the order of integration of the variables, Johansen Maximum Likelihood test to establish the existence of cointegration and the number of cointegrating equations among the variables in the models. Error Correction model was used to examine the relationship among the variables. This study used published quarterly secondary data extracted from the Kenya National Bureau of Statistics (KNBS) and Central Bank of Kenya (CBK) database. The results revealed advances in electronic technology have transformed the monetary landscape in a ft.mda~ental way. We observed that financial innovation has h~d a positive impact on the demand for money in Kenya both in the long-run and in the short-run. ix