Author(s)

Morlai Bangura, Isatu Kargbo^*, Sandy Pessima

Research Department, Bank of Sierra Leone, Freetown, Sierra Leone.

This study seeks to examine the stability of the money demand function in Sierra Leone taking into account financial innovation and structural break for the period 1980 to 2016 using the autoregressive distributed lag (ARDL) framework. The empirical results show that there is a unique cointegrated and stable long-run relationship among real broad money and its determinants. The estimated results also revealed that in the long-run, financial innovation, real income, inflation rate and exchange rate significantly impact real money balances in Sierra Leone. Specifically, financial innovation has a negative relationship with real money balances. This implies that financial innovation is crucial in explaining money demand in Sierra Leone, given that financial innovations are becoming more prominent in aiding financial intermediation. In the short-run, only financial innovation and inflation have an impact on real money balance. All the other variables in the model are not statistically significant. Finally, the CUSUM and CUSUMSQ tests revealed that demand for real money balances in Sierra Leone is stable, despite the inclusion of financial innovation and accounting for structural break.

Money Demand, Financial Innovation, ARDL

Bangura, M. , Kargbo, I. and Pessima, S. (2022) Financial Innovation in Sierra Leone: Is the Money Demand Still Stable?. Modern Economy, 13, 284-299. doi: 10.4236/me.2022.133017.