THE DEMAND FOR MONEY AND THE IMPACT OF FINANCIAL INNOVATION:
AN EMPIRICAL STUDY OF MALAYSIA

Jasni M. SHARIFF (University of Malaysia )
Ahmad Mosfi MAHMOOD (University of Malaysia)
Thirunaukarasu SUBRAMANIAM (University of Malaysia)

Generally, the demand for money is determined by the wealth and the opportunity cost of holding money. The traditional theory suggests, real income (which measures the wealth), and expected inflation or expected interest rate on alternative financial assets (measures the opportunity cost of holding money) are factors that determined the behaviour of money demand. However, as the financial system develops, the financial institutions and markets will also develop. So does the financial instrument. The developments of financial system can happen in the presence of financial innovation. Financial innovation reflects the state of financial technology and other institutional factors. The financial innovation engages with the availability of substitutes for money-such as credit cards. Thereby, financial innovation increases the opportunity cost of holding money and the demand for money reduces. Therefore, the main purpose of this paper is to study the impact of financial innovation to the narrow money demand (M1) in Malaysia. Number of credit cards holder will be used as a proxy of financial innovation. Traditional variables in explaining the behaviour of money demand will also be included in the models. In addition, the models will be tested on the presence of misspecification in order to verify the models.