A Dynamic Analysis of Money Velocity in Yemen :Evidence from an Autoregressive Distributed Lag (ARDL) Model

Purpose: This study examines the determinants of money velocity within the Yemeni economy, a distinctive analytical context characterized by prolonged armed conflict, bifurcated institutional governance, and parallel banking operations. The research aims to identify both short-run adjustment dynamics and long-run equilibrium relationships among key monetary and macroeconomic variables.Design/Methodology/Approach: The investigation employs annual time series data spanning 1990 to 2025 and applies the Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration analysis. The optimal model specification, ARDL(1,1,0,1,0,0,1,0,0), was selected based on the Akaike Information Criterion (AIC), enabling robust estimation of both short-run dynamics and long-run elasticities.Findings: The empirical results reveal that real GDP exerts the strongest positive influence on money velocity, with a long-run elasticity of 2.608, while broad money supply demonstrates a significant inverse relationship with an elasticity of −2.741. Financial development and currency circulation indicators contribute positively to monetary turnover. Notably, interest rates exhibit no statistically significant long-run effect, suggesting a disconnection between administered policy rates and real sector economic activity. The error correction term of −2.662 indicates rapid, oscillatory adjustment toward equilibrium, consistent with Yemen's volatile macroeconomic environment.Practical Implications: These findings offer critical insights for Yemeni monetary authorities seeking to restore currency stability under conditions of systemic fragility. Policymakers should prioritize economic output stabilization and financial sector development as primary channels for influencing monetary dynamics, while recognizing the limited effectiveness of conventional interest rate policy in the current institutional context.