Examining The Effect Of Financial Innovation On The Stability Of The Demand For Money Function In Namibia

ABSTRACT

The study examines the effect of financial innovation on the demand for money in Namibia. The sample period of the study covers the first Quarter of 2000 to the fourth Quarter of 2013. The secondary data utilized is sourced from Bank of Namibia, Namibia Statistics Agency as well as the World Bank Financial Statistics. The study employs the following variables; real Gross Domestic Product (GDP) as a proxy for income, inflation, repo rate and credit extended to the private sector as a proxy for financial innovation. The VAR technique, which has been used by various scholars since its inception in 1980 by Christopher Sims is employed to investigate the dynamics of Namibia’s macroeconomic data. The Augmented Dickey-Fuller test and the Phillips-Perron tests show that all variables in the model are integrated of order 1, the co-integration results indicate the absence of long-run association among the variables. The result further indicates that private sector credit extension only affects money demand in the short run, albeit, insignificantly. This implies that financial innovation may not be having an impact on demand for money in Namibia. In addition, AR polynomial has modulus that are less than one hence, the VAR stability condition is not violated and this implies that the demand for money function is stable. Inclusion of financial innovation to model the demand for money in Namibia need cautious consideration as financial innovation was insignificant in the model. However Policies to deepen the financial market in Namibia by way of promoting financial intermediation between savers and investors in the economy still need to be pursued like the Namibia Financial sector strategy 2010-2020. Financial sector deepening smoothen credit allocation, encourage savings, and reduce constraints on capital accumulation by economic agents. This can be envisaged to increase demand for money and promote economic growth in the short-run.