The Implications of Financial Innovations on Money Demand in Nigeria
The demand for money is found to be a major determinant of liquidity preference. This study empirically investigated financial innovations as it relates to money demand in Nigeria over the period 1981 – 2016. With data sourced from the Central Bank of Nigeria Statistical Bulletin. The study estimated a VAR model and showed that long-run demand for real balances in Nigeria depends upon real income on its own interest rate. Also, the empirical analysis showed that income and interest rate exert influence on money demand, while financial innovations in Nigeria has but little influence on the demand for money. The result implies that financial innovation is not only an important variable in determining money demand but that as financial innovation increases it affects the demand for money negatively as individuals gradually move away from more liquid assets to less liquid assets with growth in new as such decrease in the demand for money. The result implies that income and interest rate exert influence on money demand, while financial innovations in Nigeria has but little influence on the demand for money. This study therefore recommends that Government and policy makers should be thorough in formulating and implementing unpredictable changes in the money demand due to financial innovation which could lead to misspecification of the money demand; unstable money demand despite its immerse benefits to the economy such as efficiency and low transaction costs.
Keywords- Financial Innovations, Money Demand, Money Stocks, Monetary Policy