COMPARING THE FORECASTS OF THE DEMAND FOR MONEY IN MALAYSIA WITH THE INCLUSION OF FINANCIAL INNOVATION USING DIFFERENT ESTIMATION METHODS

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

In this paper, we compare the forecasting performance of multivariate models (ARDL/VECM/DOLS/FMOLS) versus univariate models (ARIMA/ETS) for the purpose of forecasting the real demand for money in Malaysia using monthly data during 2010Q1-2018Q4. This study overcomes the issue of misspecification by incorporating financial innovation in the money demand function using separate measures of payment instruments (credit card, charge card, debit card, e-money), payment channels (Real Time Electronics Transfer of Funds and Securities or RENTAS, Interbank GIRO, Financial Process Exchange or FPX and direct debit) and payment channels (Automated Teller Machines or ATM, mobile banking) to capture the effect of financial innovations. The multivariate models which are categorized into structural models (relying on a structural relationship between money demand and other variables) are also cointegration based models meaning that variables have long-run associationship and move together in the long-run while non-structural (non-cointegration) based techniques (ARIMA and ETS model) do not rely on such a structural relationship. We conclude that structural models are better for longer term forecasting. Non-structural models (notably ARIMA) have better forecasting performance for short term horizons such as one year than they do for long term horizons. However, our findings indicate that even for short term horizons, structural models do better than non-structural models but the gap between forecasting accuracy for these two kinds of models is much narrower in the short term horizon compared to long term horizon. The results also indicate that FMOLS has the most predictive power among cointegration/structural/multivariate based models for both short (12-months) and long-time (60-months) horizons. In the context of this model (FMOLS), financial innovation have positive yet small impact on money demand in Malaysia. Finally, we do out-of-sample forecast using FMOLS.

Keywords: Malaysia, Money Demand, Financial Innovations, Multivariate, Univariate, Cointegration

JEL classification: E41, E42, E52
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LONG RUN RELATIONSHIPS AND SHORT RUN DYNAMICS AMONG UNEMPLOYMENT AND DEMAND COMPONENTS: A STUDY ON SRI LANKA, INDIA AND BANGLADESH

Ramesh CHANDRA DAS

Associate Professor of Economics, Katwa College, WB, India

ramesh051073@gmail.com

Kamal RAY

(Retd), Associate Professor of Economics, Katwa College, WB, India

kamal420ray@yahoo.co.in

Abstract

Unemployment of an economy should have some associations with its aggregate demand components. With time series data for 1996-2015 on three aggregate demand components, namely, consumption expenditure (CON), capital formation (GCF) and public spending (GOV), we did econometric exercises such as cointegration, VECM and Wald test to test whether there are long run equilibrium relationships among unemployment (UN) and the three demand components and directions of their interplays in long run and short run frameworks. Doing appropriate diagnostic checking for the residuals of all the estimations, the results show that all the four series are cointegrated that justifies long run associationships among them. Further, the long run causality analysis through VECM reveals that UN, CON and GCF make a cause to GOV for Sri Lanka.  For India, UN is caused by all three components of aggregate demand and its CON is caused by UN, GCF and GOV. Bangladesh does not produce any such long run causal relationships among the variables. Further for short run causality results, CON is caused by UN, GCF and GOV in Sri Lanka and India, and for Bangladesh and India, there are short run causalities running from CON, GCF and GOV to unemployment. This means, aggregate demand components in India and Bangladesh influence the unemployment rates of these two countries

Keywords: Unemployment, aggregate consumption, government expenses, gross capital formation, cointegration, VECM, Wald test

JEL classification: J64, E21, E22, E24, H5, C32
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USING ARDL APPROACH TO COINTEHRATION FOR INVESTIGATING THE RELATIONSHIP BETWEEN PAYMENT TECHNOLOGIES AND MONEY DEMAND ON A WORLD SCALE

Payam MOHAMMAD ALIHA

Ph.D candidate, National University of 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

Abu Hassan SHAAR

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

ahassan@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 estimates the relationship between financial innovation and money demand in world countries with a focus on the number of automated teller machines (ATMs) using the ARDL approach to cointegration. In this study, we estimated a conventional money demand model with currency in circulation (M2) as dependent variable and gross domestic product (GDP, constant 2005 US$), interest rate (IRATE), the number of automated teller machines per 100,000 adults (ATM) to take into account for the effects of financial innovation as dependent variables. It covers 215 countries and territories over the period 2004-2013. This paper adopts the bounds testing procedure developed by Pesaran et al. (2001) to test the stability of the long-run money demand and determine the short-run dynamics for all of the countries as a whole. The empirical evidence points to the existence of long-run and cointegrating relationships between variables meaning all of these variables move together in the long run. The speed of adjustment toward long run equilibrium is – 0.4345 which means that the whole system gets back to long run equilibrium at the speed of 43.45 percent. The results confirm that in the short-run, ATM does not impact money demand.

Keywords: Money demand, Financial innovations, Stability, ARDL, Cointegration.

JEL classification: R21, R32

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