INVESTIGATING THE IMPACT OF FINANCIAL INNOVATION ON THE VOLATILITY OF THE DEMAND FOR MONEY IN THE UNITED STATED IN THE CONTEXT OF AN ARCH/GARCH MODEL

Payam MOHAMMAD ALIHA

Ph.D candidate, Universiti Kebangsaan Malaysia (UKM), Malaysia

payammaliha@gmail.com

Tamat SARMIDI

Associate Professor Dr. at Faculty of Economics and Management, Universiti Kebangsaan Malaysia (UKM), Malaysia

tamat@ukm.edu.my

Fathin FAIZAH SAID

Dr. at Faculty of Economics and Management, Universiti Kebangsaan Malaysia (UKM), Malaysia

fatin@ukm.edu.my

Abstract

This paper investigates the effect of financial innovation on real money demand in the United States using GARCH estimation technique between 1990 and 2016. Ratios of broad money stock to GDP and growth in net domestic credit to GDP were included in a conventional money demand function to account for the financial innovation. The results indicate that neither external shocks (financial innovation) nor internal shocks (previous years’ information) influence the volatility of the money demand.

Keywords: money demand, ARCH/GARCH, financial innovation, internal/external shock

JEL classification: C13, C40, C51, E40, E44
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