Abstract

This study examines the stability of India’s money demand function over the post-liberalization period and investigates how financial innovation — particularly developments in payment systems digital banking and non-bank financial instruments — has affected the demand for money. Using quarterly data spanning from 1996 Q2 to 2021 Q4 we estimate a money demand equation that incorporates traditional economic determinants (real income interest rate) along with proxies for financial innovation (digital transactions volume banking sector credit penetration share of non-bank financial assets). Employing the ARDL bounds testing approach to cointegration and vector error-correction modeling (VECM) our findings suggest that the long-run demand for money in India remains stable despite financial innovation. However the presence of financial innovation modifies the sensitivity of money demand to traditional determinants: the opportunity cost effect of interest rate becomes weaker and transaction d