The Role of Financial Development in Determining the Velocity of Money in Circulation: The Case of Jordan

Mohammad Al-Masaeid

doi:doi:10.11648/j.eco.20221102.12

| Peer-Reviewed

The Role of Financial Development in Determining the Velocity of Money in Circulation: The Case of Jordan

Mohammad Al-Masaeid

Published in Economics (Volume 11, Issue 2)

Received: 18 April 2022 Accepted: 3 May 2022 Published: 12 May 2022

Views: Downloads:

Download PDF

Share This Article

Twitter
Linked In
Facebook

Abstract

This paper aimed to analyze the effect of the financial progress that happened in the Jordanian economy on the velocity of money in circulation from the period 1980 to 2019. Specifically, the ratio of demand deposits to time deposits and the share of credit facilities to the private sector from GDP were used as measures of financial development while money supply (1) to GDP and money supply (2) to GDP were used as measures of the velocity of money. To achieve these goals, the paper has used the descriptive approach and the Auto-Regressive Distribution Lag (ARDL) approach. The tests showed that the variables became stationary after taking the first difference, and the variables are co-integration. The results of the study showed that. The ARDL model and cointegration test used in the paper reveal that the estimated parameters of the explanatory variables were more significant in the long term model and short term than in the short term it was not except for dynamics for the velocity of broad money (V2). The share of credit facilities to the private sector from GDP has a significant negative effect on the velocity of narrow money (V1) and has a considerable positive effect on the velocity of money in the wide range (V2). adding to the previous point, the ratio of demand deposits to time deposits has a significant positive effect on the velocity of narrow money (V1) and has a significant negative effect on the velocity of wide money (V2). finally, the interest rate has a substantial positive influence on both the velocity of money in a narrow and a wide range. Based on the results, the paper recommended the central bank of Jordan set strategies to stabilize the money demand function in the Jordanian economy. Since the dynamic change in life, communication and accessing the information the behavior of individuals regarding assets loans and spending is changing rapidly which leading to massive challenges to central banks’ policy formulation regarding the velocity of money.

Published in	Economics (Volume 11, Issue 2)
DOI	10.11648/j.eco.20221102.12
Page(s)	76-87
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Money Supply, GDP, Monetary Policy, Financial Development, Velocity of Money, ARDL

References

[1]	Akhtaruzzaman (2009). Financial Development and Velocity of Money in Bangladesh: A Vector Auto-Regression Analysis. Policy Analysis Unit (PAU) Bangladesh Bank Bangladesh https://ideas.repec.org/p/ess/wpaper/id2062.html.
[2]	Akinlo Anthony (2012). Financial Development and the Velocity of Money in Nigeria: An Empirical Analysis. The Review of Finance and Banking 4 (2) 97-113.
[3]	AlJuijati Aws and Al Mushahadanii Diaa (2018). Factors Affecting the Money Velocity the Case of the Hashemite Kingdom of Jordan for the period 1980-2015 An Empirical Study. Tikrit Journal of Administration and Economics Sciences 14 (42) 1 297-311.
[4]	Altayee Hatem and Adam Mustafa (2013). Financial Development and the Velocity of Money Under Interest-Free Financing System: An Empirical Analysis. American Based Research Journal 08 53-65.
[5]	Barradas R. (2015) Evolution of the Financial Sector–Three Different Stages: Repression Development and Financialisation Dinamiacet-IULWorking papers No 8-2015.
[6]	Bordo Michael D and Jonung Lars (1989). The Long-Run Behavior of Velocity: The Institutional Approach Revisited. National Bureau of Economic Research Working Paper Series No. 3204 10.3386/w3204 http://www.nber.org/papers/w3204.
[7]	Breton Bert (1968). A Stable Velocity Function for Canada. Economica New Series 36 (143) 451-453.
[8]	Center for Strategic Studies (2016). IMF Programs (Jordan): 1989-2016 Results and Lessons Learned University of Jordan Jordan.
[9]	Chakraborty T and Wilson V (1989) 'The Behaviour and the Determinants of the Income Velocity of Money in India' Paper Presented at the Workshop on Monetary System NIBM.
[10]	Darrat Ali (1988). The Islamic Interest-Free Banking System: One Empirical Evidence Applied Economics 20 417-425.
[11]	Driscoll M. J. and Lahiri A. K. (1983). Income Velocity of Money in Agricultural Developing Economies Review of Economics and Statistics 65 393-401.
[12]	Fisher I. (1911). “The Purchasing Power of Money”. New York: Macmillan.
[13]	Friedman Milton and Schwartz Anna (1982). Monetary Trends in the United States and the United Kingdom: Their Relation to Income Prices and Interest Rates National Bureau of Economic Research https://EconPapers.repec.org/RePEc:nbr:nberbk:frie82-2.
[14]	Friedman Milton. (1970). A Theoretical Framework for Monetary Analysis. Journal of Political Economy 78 (2) 193-238.
[15]	Goodhart Charles A. E. (1998). The two concepts of money: implications for the analysis of optimal currency areas European Journal of Political Economy Elsevier 14 (3) pages 407-432.
[16]	Gujarati D. N. (2006). Essentials of Econometrics 3rd Edition McGraw-Hill Boston.
[17]	Gupta S B (1999). Monetary Planning for India Oxford University. p. 202 Press New York.
[18]	IMF’s International Financial Statistics (2004). see lines 24 and 25.
[19]	Jadhav N. (1994). Monetary Economics for India. MacMillan India Ltd. New Delhi 110062. Gupta S B Monetary Planning for India Oxford University Press New York.
[20]	Jadhav Narendra (1994). 'Money Output and Prices: Causality Issues and Evidence Monetary Economic for India Macmillan India Limited Delhi.
[21]	Joseph A. Schumpeter (1954). History of Economic Analysis New York: Oxford University Press.
[22]	Keynes John Maynard (1923). A Tract on Monetary Reform. London: Macmillan.
[23]	Keynes John Maynard (1936). The general theory of employment interest and money. London: Macmillan.
[24]	Khanom Ms. Sharmina (2019). Economic Transformation in Bangladesh and the Income Velocity of Broad Money: An Econometric Analysis. The Journal of Social Sciences Research 5 (2) 408-417.
[25]	Kingori Zacharia Irungu (2003). The determinants of Income Velocity of Money in Kenya (1992:1–2002:12) MSc Economics Research Paper University of Zimbabwe.
[26]	Mankiw N. Gregory (2009). Macroeconomics 7th ed. New York: Worth Publishers.
[27]	Mwega F Mbiti I. and Weil D. (2012). The Implications of Innovations in the Financial Sector on the Conduct of Monetary Policy in East Africa International Growth Center working paper paper 12/0460.
[28]	Nampewo D. Tinyinondi G. A. Kawooya D. R. et al (2016). Determinants of private sector credit in Uganda: the role of mobile money. Financ Innov 2 13 https://doi.org/10.1186/s40854-016-0033-x.
[29]	Ng’imor Benjamin Pkemei and Muthoga Samuel (2015). The Impact of Financial Development on Income Velocity of Money in Kenya. International Journal of Development Research 5 02 3522-3534.
[30]	Pesaran M. (1997). The Role of Economic Theory in Modelling the Long Run. Economic Journal 107 (440) 178-91.
[31]	Pesaran M. Shin Y. and Smith R. (2001). Bound Testing Approach to the Analysis of Relationship Journal of Applied Econometrics 16 (1) 287-300.
[32]	PETTY W. (1662). “Traité des taxes et des contributions; 1682 Quantulumcumque concernant la monnaie”. OEuvres économiques de Sir William Petty Giard et Brière 1905.
[33]	Rami, G. (2010). Causality between money, prices, and output in India (1951–2005): A Granger causality approach. Journal of Quantitative Economics, 8 (2), 20–41.
[34]	Short Brock (1973). The Velocity of Money and Per capita Income in Developing Economics: Malaysia and Singapore. Journal of Development Studies 291-300.
[35]	Xavier Sala-i-Martin Doppelhofer G. & Miller R. (2004). Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach. The American Economic Review 94 (4) 813-835.
[36]	Yua, H. (2013). Review of the Studies on the China's Velocity of Money Influencing Factors. Journal of Hubei University of Education.

Cite This Article

Plain Text BibTeX RIS

APA Style

Mohammad Al-Masaeid. (2022). The Role of Financial Development in Determining the Velocity of Money in Circulation: The Case of Jordan. Economics, 11(2), 76-87. https://doi.org/10.11648/j.eco.20221102.12

Copy | Download

ACS Style

Mohammad Al-Masaeid. The Role of Financial Development in Determining the Velocity of Money in Circulation: The Case of Jordan. Economics. 2022, 11(2), 76-87. doi: 10.11648/j.eco.20221102.12

Copy | Download

AMA Style

Mohammad Al-Masaeid. The Role of Financial Development in Determining the Velocity of Money in Circulation: The Case of Jordan. Economics. 2022;11(2):76-87. doi: 10.11648/j.eco.20221102.12

Copy | Download

@article{10.11648/j.eco.20221102.12,
  author = {Mohammad Al-Masaeid},
  title = {The Role of Financial Development in Determining the Velocity of Money in Circulation: The Case of Jordan},
  journal = {Economics},
  volume = {11},
  number = {2},
  pages = {76-87},
  doi = {10.11648/j.eco.20221102.12},
  url = {https://doi.org/10.11648/j.eco.20221102.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.eco.20221102.12},
  abstract = {This paper aimed to analyze the effect of the financial progress that happened in the Jordanian economy on the velocity of money in circulation from the period 1980 to 2019. Specifically, the ratio of demand deposits to time deposits and the share of credit facilities to the private sector from GDP were used as measures of financial development while money supply (1) to GDP and money supply (2) to GDP were used as measures of the velocity of money. To achieve these goals, the paper has used the descriptive approach and the Auto-Regressive Distribution Lag (ARDL) approach. The tests showed that the variables became stationary after taking the first difference, and the variables are co-integration. The results of the study showed that. The ARDL model and cointegration test used in the paper reveal that the estimated parameters of the explanatory variables were more significant in the long term model and short term than in the short term it was not except for dynamics for the velocity of broad money (V2). The share of credit facilities to the private sector from GDP has a significant negative effect on the velocity of narrow money (V1) and has a considerable positive effect on the velocity of money in the wide range (V2). adding to the previous point, the ratio of demand deposits to time deposits has a significant positive effect on the velocity of narrow money (V1) and has a significant negative effect on the velocity of wide money (V2). finally, the interest rate has a substantial positive influence on both the velocity of money in a narrow and a wide range. Based on the results, the paper recommended the central bank of Jordan set strategies to stabilize the money demand function in the Jordanian economy. Since the dynamic change in life, communication and accessing the information the behavior of individuals regarding assets loans and spending is changing rapidly which leading to massive challenges to central banks’ policy formulation regarding the velocity of money.},
 year = {2022}
}

Copy | Download

TY  - JOUR
T1  - The Role of Financial Development in Determining the Velocity of Money in Circulation: The Case of Jordan
AU  - Mohammad Al-Masaeid
Y1  - 2022/05/12
PY  - 2022
N1  - https://doi.org/10.11648/j.eco.20221102.12
DO  - 10.11648/j.eco.20221102.12
T2  - Economics
JF  - Economics
JO  - Economics
SP  - 76
EP  - 87
PB  - Science Publishing Group
SN  - 2376-6603
UR  - https://doi.org/10.11648/j.eco.20221102.12
AB  - This paper aimed to analyze the effect of the financial progress that happened in the Jordanian economy on the velocity of money in circulation from the period 1980 to 2019. Specifically, the ratio of demand deposits to time deposits and the share of credit facilities to the private sector from GDP were used as measures of financial development while money supply (1) to GDP and money supply (2) to GDP were used as measures of the velocity of money. To achieve these goals, the paper has used the descriptive approach and the Auto-Regressive Distribution Lag (ARDL) approach. The tests showed that the variables became stationary after taking the first difference, and the variables are co-integration. The results of the study showed that. The ARDL model and cointegration test used in the paper reveal that the estimated parameters of the explanatory variables were more significant in the long term model and short term than in the short term it was not except for dynamics for the velocity of broad money (V2). The share of credit facilities to the private sector from GDP has a significant negative effect on the velocity of narrow money (V1) and has a considerable positive effect on the velocity of money in the wide range (V2). adding to the previous point, the ratio of demand deposits to time deposits has a significant positive effect on the velocity of narrow money (V1) and has a significant negative effect on the velocity of wide money (V2). finally, the interest rate has a substantial positive influence on both the velocity of money in a narrow and a wide range. Based on the results, the paper recommended the central bank of Jordan set strategies to stabilize the money demand function in the Jordanian economy. Since the dynamic change in life, communication and accessing the information the behavior of individuals regarding assets loans and spending is changing rapidly which leading to massive challenges to central banks’ policy formulation regarding the velocity of money.
VL  - 11
IS  - 2
ER  -

Copy | Download

Author Information

Mohammad Al-Masaeid

Department of Economics, Faculty of Economics and Administrative Sciences, Yarmouk University, Irbid, Jordan

Download PDF

Sections

Plain Text BibTeX RIS

APA Style

Mohammad Al-Masaeid. (2022). The Role of Financial Development in Determining the Velocity of Money in Circulation: The Case of Jordan. Economics, 11(2), 76-87. https://doi.org/10.11648/j.eco.20221102.12

Copy | Download

ACS Style

Mohammad Al-Masaeid. The Role of Financial Development in Determining the Velocity of Money in Circulation: The Case of Jordan. Economics. 2022, 11(2), 76-87. doi: 10.11648/j.eco.20221102.12

Copy | Download

AMA Style

Mohammad Al-Masaeid. The Role of Financial Development in Determining the Velocity of Money in Circulation: The Case of Jordan. Economics. 2022;11(2):76-87. doi: 10.11648/j.eco.20221102.12

Copy | Download

@article{10.11648/j.eco.20221102.12,
  author = {Mohammad Al-Masaeid},
  title = {The Role of Financial Development in Determining the Velocity of Money in Circulation: The Case of Jordan},
  journal = {Economics},
  volume = {11},
  number = {2},
  pages = {76-87},
  doi = {10.11648/j.eco.20221102.12},
  url = {https://doi.org/10.11648/j.eco.20221102.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.eco.20221102.12},
  abstract = {This paper aimed to analyze the effect of the financial progress that happened in the Jordanian economy on the velocity of money in circulation from the period 1980 to 2019. Specifically, the ratio of demand deposits to time deposits and the share of credit facilities to the private sector from GDP were used as measures of financial development while money supply (1) to GDP and money supply (2) to GDP were used as measures of the velocity of money. To achieve these goals, the paper has used the descriptive approach and the Auto-Regressive Distribution Lag (ARDL) approach. The tests showed that the variables became stationary after taking the first difference, and the variables are co-integration. The results of the study showed that. The ARDL model and cointegration test used in the paper reveal that the estimated parameters of the explanatory variables were more significant in the long term model and short term than in the short term it was not except for dynamics for the velocity of broad money (V2). The share of credit facilities to the private sector from GDP has a significant negative effect on the velocity of narrow money (V1) and has a considerable positive effect on the velocity of money in the wide range (V2). adding to the previous point, the ratio of demand deposits to time deposits has a significant positive effect on the velocity of narrow money (V1) and has a significant negative effect on the velocity of wide money (V2). finally, the interest rate has a substantial positive influence on both the velocity of money in a narrow and a wide range. Based on the results, the paper recommended the central bank of Jordan set strategies to stabilize the money demand function in the Jordanian economy. Since the dynamic change in life, communication and accessing the information the behavior of individuals regarding assets loans and spending is changing rapidly which leading to massive challenges to central banks’ policy formulation regarding the velocity of money.},
 year = {2022}
}

Copy | Download

TY  - JOUR
T1  - The Role of Financial Development in Determining the Velocity of Money in Circulation: The Case of Jordan
AU  - Mohammad Al-Masaeid
Y1  - 2022/05/12
PY  - 2022
N1  - https://doi.org/10.11648/j.eco.20221102.12
DO  - 10.11648/j.eco.20221102.12
T2  - Economics
JF  - Economics
JO  - Economics
SP  - 76
EP  - 87
PB  - Science Publishing Group
SN  - 2376-6603
UR  - https://doi.org/10.11648/j.eco.20221102.12
AB  - This paper aimed to analyze the effect of the financial progress that happened in the Jordanian economy on the velocity of money in circulation from the period 1980 to 2019. Specifically, the ratio of demand deposits to time deposits and the share of credit facilities to the private sector from GDP were used as measures of financial development while money supply (1) to GDP and money supply (2) to GDP were used as measures of the velocity of money. To achieve these goals, the paper has used the descriptive approach and the Auto-Regressive Distribution Lag (ARDL) approach. The tests showed that the variables became stationary after taking the first difference, and the variables are co-integration. The results of the study showed that. The ARDL model and cointegration test used in the paper reveal that the estimated parameters of the explanatory variables were more significant in the long term model and short term than in the short term it was not except for dynamics for the velocity of broad money (V2). The share of credit facilities to the private sector from GDP has a significant negative effect on the velocity of narrow money (V1) and has a considerable positive effect on the velocity of money in the wide range (V2). adding to the previous point, the ratio of demand deposits to time deposits has a significant positive effect on the velocity of narrow money (V1) and has a significant negative effect on the velocity of wide money (V2). finally, the interest rate has a substantial positive influence on both the velocity of money in a narrow and a wide range. Based on the results, the paper recommended the central bank of Jordan set strategies to stabilize the money demand function in the Jordanian economy. Since the dynamic change in life, communication and accessing the information the behavior of individuals regarding assets loans and spending is changing rapidly which leading to massive challenges to central banks’ policy formulation regarding the velocity of money.
VL  - 11
IS  - 2
ER  -

Copy | Download