Impact of technology growth on demand for currency in circulation in Kenya

Abstract

Kenya has undergone major technological developments in banking sector which has increased efficiency, effectiveness and more so introduction of new forms of payments and new products in the banking sector. Technology is expected to reduce demand for currency in circulation by increasing the speed of money circulation, increasing supply, greater diversity of goods whose money values are transferred by electronic payment instruments, as well as allocation of electronic balance by some publishers. However, the impact of technological growth on money demand has received much attention from researchers but there is no still solid evidence on whether technology growth has reduced demand for currency in circulation. Inspired by the refutable empirical finding on technology growth and demand for money relationships and limitations of country specific studies; this study analyzed the impact of technology growth on demand for currency in circulation in Kenya. The study applied VECM estimation technique and time series quarterly data for the period 2007 – 2014 to investigate the impact of technology on demand for currency in circulation. Keynes transaction theory of money demand was used to establish a link between theory and empirics. The empirical findings suggest a long-run causality running from the explanatory variables to demand for currency in circulation and 34% speed of adjustment to equilibrium; implying that 34% of discrepancy in demand of currency in circulation of the previous year is adjusted for the current year. The results also indicate a short run causality running from commercial lending interest rates, ATMs and Credit cards to demand for currency in circulation. Technology growth was found to have a long-run and short run effects on demand for currency in circulation. In short- run, ATMs and credit cards were found to increase demand for currency in circulation while mobile money transfer was found to have no impact. GDP and Commercial lending interest rate were also found to have a long-run impact on the demand for currency in circulation. Commercial lending interest rates was found to affect demand for currency in circulation, in that, the higher the commercial lending rates the lesser the demand for currency in circulation. Previous years’ GDP was found to have no impact on current years’ demand for currency in circulation. It could be concluded that technology convert money to electronic forms and this tend to blur the distinction between monetary and non-monetary assets. It is therefore, prudent for the stability of the demand for money to be constantly re-examined by the monetary authorities to ensure an effective control of the monetary base since technological advancement is an ever-changing continuous process