Asian Development Review· 2026Q2
Effects of Financial Innovation on the Demand for Money: Evidence from Bangladesh
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- Q2SCImago
- 2026year
Short summary
Financial innovation and exchange rates, not income, are now the primary drivers of money demand in Bangladesh, with financial innovation showing a significant positive impact.
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Key points
- Money demand in Bangladesh is now driven by interest rates and financial innovation, not income.
- Financial innovation has a significant positive impact on money demand.
- The exchange rate also plays a role in the new money demand drivers.
- Monetary policy needs to account for financial innovation due to its impact on money demand and potential volatility.
AI-generated from the title and abstract; the full text is not read.
Abstract
Empirical analyses of the money demand function in Bangladesh typically consider only income level and the interest rate. This study estimates the traditional money demand function alongside extended models incorporating financial innovation and the exchange rate for comparative analysis. After establishing a long-term relationship between monetary aggregates (M2 or M3) and their determinants, the models are estimated. In the traditional model, both income level and the interest rate are statistically significant with the expected signs. However, when including financial innovation and the exchange rate, the interest rate remains significantly negative, financial innovation becomes significantly positive, and income level loses significance. This suggests that money demand drivers have shifted from income level and the interest rate to the interest rate and financial innovation. As mobile financial services expand, the velocity of money may increase and introduce volatility in monetary aggregates. Therefore, monetary policy formulation should effectively account for financial innovation.
The authors' abstract, as published at the source. Asian Development Review, 2026 · DOI ↗
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Field: Information Systems
Information SystemsComputer Science