Velocity of Money and Financial Development in BRICS Countries

Abstract

The manner in which the velocity of money behaves is very influential when determining how much financial resources an economy can produce. An unpredicted velocity of money and unstable demand for money results in a spineless and ineffective management and control of monetary policy. The study determined the "impact of financial development on the velocity of money in Brazil, Russia, India, China and South Africa (BRICS) countries for the period 1996 to 2019". The study employed a panel autoregressive distributive lag (PARDL) to estimate the relationship between financial development and velocity of money in BRICS countries. In addition, "panel fully modified least squares and panel dynamic least squares were employed to supplement PARDL". A long run relationship between financial development and the velocity of money in BRICS countries was confirmed. A positive and statistically significant long run relationship was found between liquid liabilities to GDP and velocity of money, while a negative and statistically significant relationship was found with stock market capitalisation. The speed of adjustment indicted that about 68.5% of disequilibrium would be rectified in the next year in the BRICS countries. It can be concluded that financial development has a strong significant impact on the velocity of money particularly when liquid liabilities were considered. Therefore, financial institutions should promote people to hold liquid portfolios such as a savings or checking account at their local bank or credit union, a money market account or/ and short-term certificates of deposit. The study therefore, makes recommendations that since stable financial development, both globally and within countries, have the potential to generate jobs and improve productivity more should be done in ensuring an effective and sound developed financial sector system as it can influence the velocity of money channel.