The impact of money demand stability on the effectiveness of monetary policy in a context of financial innovation: Econometric evidence between 1990 and 2023

Abstract

This study investigates the stability of the money demand function in Morocco from 1990 to 2023, focusing on the impact of financial innovation and its implications for monetary policy effectiveness. The research integrates key macroeconomic and financial variables GDP, financial development, financial innovation, inflation, interbank interest rates, and financial inclusion within the monetary framework of Bank Al-Maghrib. Using the Autoregressive Distributed Lag (ARDL) and Error Correction Model (ECM) approaches via EViews, the study examines both short- and long-run dynamics. Results show that in the long run, financial innovation and interbank interest rates destabilize money demand, while GDP, financial development, financial inclusion, and inflation enhance its stability. In the short run, GDP, financial development, and inclusion remain supportive, whereas innovation, inflation, and interest rates exert downward pressure. The study concludes that while financial innovation improves system efficiency, it also disrupts traditional monetary control mechanisms. As such, monetary authorities must modernize tools to adapt to evolving financial environments. Strategic recommendations include enhancing regulatory oversight of financial innovations, promoting financial inclusion, and integrating innovation into forecasting models. Financial literacy and technological innovation are also emphasized as levers for maintaining monetary stability. Despite some data limitations and model constraints, the study provides strong theoretical, methodological, and empirical contributions. It also opens future research avenues, particularly in non-linear modeling, cross-country comparisons, and the role of emerging technologies like blockchain and cryptocurrencies. This work offers valuable insights for developing economies navigating financial digitalization and monetary policy adaptation.