Financial Innovations and Money Velocity in Uganda

Abstract This paper investigates the impact of financial innovations on the stability of money velocity. The paper contributes to the existing literature in three ways; first, we develop a simple analytical framework for money velocity taking into account the effect of financial innovations. Second, we test the model on Ugandan time series data using the ARDL bounds testing approach. Third, we check for the stability of the long‐run money velocity function. Results show significant negative and positive effects of financial innovations on the money velocity in the short and long run, respectively. In addition, the long‐run money velocity equation is stable despite the financial innovations that have evolved over time. Furthermore, other macroeconomic determinants of money velocity, including real income, the 91‐day treasury bill rates, inflation expectations and the exchange rate exhibited a significant and positive long‐run relationship with money velocity except for real income. These results suggest that financial innovations have not altered the long‐run stability of money velocity in Uganda. Thus, given the importance of financial innovations in enhancing the access to financial services, we recommend that more technological advances and diversification of financial products should be enhanced so as to improve financial sector development and overall economic growth.