Financial Innovation and Money Demand in Portugal: A Preliminary Study
Pedro Miguel Avelino Bação
This paper consists of two parts. In the fist part we briefly summarize the evolution of the portfolio of financial assets available to savers in Portugal. Portugal experienced a process of considerable financial innovation during the last quarter of the century. However, two time-periods should be considered when studying the recent development of the Portuguese financial sector: the one before 1985 and the one after. The description of this process (specially as far as it concerns financial assets), its sources and outcomes, is our main task in the first part of this paper.
In the second part of this paper we study an econometric model of the demand for narrow money in Portugal between 1970 and 1996. The main idea behind the model presented is that the velocity of circulation of narrow money can be seen as a stationary variable with a varying deterministic component. An error-correction model is estimated and tested under this hypothesis. The results show no signs of model instability. This outcome and the initial hypothesis are then discussed. According to our results, the shifts observed in the velocity of circulation seem to be unrelated to the development of financial innovation.