Effects of electronic money on velocity of money in Kenya

Abstract

The purpose of this study is to determine the effect that electronic money has on the velocity of money in Kenya as well as its determinants. The study uses income, exchange rates, expected inflation, interest rates and financial innovation as the determinants of velocity in the model. Monthly time series data from the period 2009-2016 is used and autoregressive distributed lag (ARDL) model is implemented with six measures of velocity of money as the dependent variable. The measures include velocity of; narrow money (Ml), narrow money less electronic money (Ml-EM), broad money (M3), broad money less electronic money (M3-EM), electronic money (EM) and quasi-money (M2). Exchange rate and the number of bank branches were significant in determining all the velocity measures in the long run, with a positive and negative relationship respectively. The presence of electronic money was found to reduce the positive relationship of velocity with exchange rate while the relationship of velocity with the number of bank branches became more positive. This means that increased use of electronic money may help to curb the effects of exchange rate fluctuations while at the same time it increases the velocity of money as more people get access to financial services. The study concludes that the issuance of electronic money should be controlled and closely monitored so as to avoid adverse effects to the monetary system and economy.