Abstract
This study examined the effects of mobile money—a recent innovation in Uganda’s financial-sector landscape—on aggregate economic activity and other macroeconomic variables. We first estimated the long-run mobile-money demand function using vector error correction (VEC) techniques, distinguishing between balances and transfers/transactions. We then estimated the short-run effects of mobile money on selected macroeconomic variables using structural vector autoregressive (SVAR) methods. The results showed that mobile money had moderate positive effects on monetary aggregates, consumer price index, private-sector credit, and aggregate economic activity. Mobile money balances responded to changes in monetary policy instruments, signaling possible ameliorating effects for the conduct of monetary policy. Finally, the results showed that transactional motives related to mobile money had stronger macroeconomic effects than savings motives.
Highlights
There has been growing enthusiasm for, and investigations of, the potential benefits of new financial innovations for poverty reduction and inclusive economic growth (e.g., Chibba 2009)
The results showed that mobile money has moderate positive effects on monetary aggregates, the consumer price index, and private-sector credit
The results indicated that, as expected, both real mobile money balances and the volume of transactions were negatively affected by interest rates and positively associated with economic activity
Summary
There has been growing enthusiasm for, and investigations of, the potential benefits of new financial innovations for poverty reduction and inclusive economic growth (e.g., Chibba 2009). The rapid expansion of mobile money has attracted much debate regarding its implications for the growth of the financial sector and the effectiveness of monetary policy. Concerns have been raised about the implications of mobile money for the conduct of monetary policy in Uganda. At a 2015 conference convened by the International Growth Center in Kampala under the theme “Mobile Money and the Economy,” the governor of the Bank of Uganda expressed his concerns : If more radical mobile banking business models are eventually developed in which mobile money becomes a substitute for demand deposits in banks, the ability of central banks to control interest rates could be undermined This is because central banks control short-term interest rates by varying the liquidity available for commercial banks to meet their reserve requirements. Despite these concerns, there is insufficient research on the links between mobile money and its effects on the economy and the conduct of monetary policy.
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