Financial Innovation and the Speed of Adjustment of Money Demand: Evidence from Bolivia, Israel, and Venezuela

Martina Copelman , Board of Governors of the Federal Reserve System International Finance Disc. Papers 567 , October 1996.

Traditional studies of money demand for both developed and less developed countries have shown that there are periods of "missing money," that is, there is consistent over-prediction of real balances. This paper uses cointegration techniques to study the effects of financial innovation on the demand for real balances in Bolivia, Israel and Venezuela. The results show that financial innovation can account for the instability of money demand observed in these countries. In particular, I find that the long run demand for real balances shifted down. In addition, I show that the speed at which people adjust their demand for money when out of equilibrium increases following financial innovation.

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