Financial Innovations and the Interest Elasticity of Money Demand in Jordan (2009-2022)

Abstract

This study aimed to determine the relationship between financial innovations and the interest elasticity of money demand, and based on a set of statistical tests, the ordinary least squares method was determined to achieve this goal.Using quarterly data on the Jordanian economy for the period (2009-2022), the study estimated the demand for money as a function of income and interest rate.       The empirical results reached in this study showed that all determinants of money demand have the expected signs and were statistically significant. Regarding the relationship between financial innovations and the interest elasticity of money demand, the results indicated that financial innovations after 2016 reduced the sensitivity of money demand to interest rate. Therefore, the absolute value of the interest elasticity of money demand decreased, which means an increase in the effectiveness of monetary policy as financial innovations may improve the efficiency of the financial system, in a way that facilitates the work of monetary policy and increases its effectiveness. However, monetary policy makers must monitor these innovations and developments and limit the negative changes that may accompany them, and work to design a modern monetary policy that is in line with these developments.