Financial innovation and money demand; the case of Zimbabwe (2012:1 -2020:5)

Abstract

Money demand is critical in the conduct of monetary policy in any country such that the identification of the determinants of money demand is most valuable. The study was instigated to investigate the impact of financial innovation on money demand in Zimbabwe using monthly data from 2012:1 to 2020:5. The country witnessed increased adoption of mobile money transaction, which since the introduction of the product has been trending upwards. In addition to mobile money transactions, Zimbabwe saw a rise in the adoption and use of point-of-sale transactions (POS). The demand for money under increased usage of these new financial products and payment methods need to be assessed to find out how much these financial innovations affect money demand. This will ensure effective monetary policy. Using the Augmented Dickey Fuller test, the stationarity of the variables was established to be unit root at level and were stationary at first difference. The Johansen Cointegration test was employed to determine the order of integration and the number of cointegrating equation. Having established cointegration, the Vector Error Correction Model estimation technique was used to analyse the impact of financial innovation on money demand. Using monthly data from Reserve Bank of Zimbabwe, Zimbabwe Statistics Agency (Zimstat) and Confederation of Zimbabwe Industry (CZI). the study found that there is there is a negative relationship between money demand and mobile money transactions while it had a positive relationship with POS transactions in the long run. The short run results revealed that financial innovation had a negative relationship with money demand.