Examining the Relevance of Financial Sector Development in Demand for Money: Empirical Insight from Ghana

This paper examines the impact of financial sector development on the stability of money demand within the Ghanaian context. This is crucial given the recent technological advancements in the financial sector. The International Monetary Fund’s (IMF) Financial Development Index is utilized to broaden the policy scope of the findings. This index is used because it captures the efficiency, access and depth of the financial institutions and markets of an economy. This paper applies the autoregressive distributed lag model to annual time series dataset. The findings indicate that financial development significantly reduces money demand in the long term, while income increases it. Additionally, both interest rates and exchange rates are found to decrease money demand. This paper further reveals a bidirectional Granger causality between financial development and money demand, indicating that they mutually influence each other. This bidirectional relationship suggests that policymakers should prioritize gradual and controlled financial sector growth, considering its potential impact on the effectiveness of monetary policy.