The degree of an economy’s monetization, which has an important implication on economic growth, can be affected by the conduct of monetary policy, financial sector reform, and episodes of financial crises. The paper finds that monetization—measured by the ratio of broad money to nominal GDP—in low- to middle-income countries is significantly correlated with per-capita GDP, real interest rates, and financial sector reform. It suggests that maintaining an upward momentum in monetization can be an important policy objective, particularly for low-income countries, and that monetary and financial sector policies need to be conducive to enhancing monetization. Monetization was once regarded “among the most significant aspects of the growth and development of the economies of less developed countries.”1 In other words, the degree to which money is accepted and used as a medium of exchange, a unit of account, and a store of value was considered an important indicator of economic development. More recently, a consensus is emerging that financial sector development, for which monetization can be a key contributor, is an important driver of economic growth.

Despite this recognition of the role of money in economic development, there is surprisingly little in the existing literature that analyzes underlying factors that influence monetization. It is true that there is a vast literature on the demand for money, but the focus there is the stability of money demand and its implications for the conduct of monetary policy. The interest of this paper is in analyzing the monetization phenomenon from a long-run perspective: why do many emerging countries show steady or rapid rise in the degree of monetization while a significant number of low-income countries experience an extended period of downward trends (demonetization) or sudden reversals? We employ an empirical methodology suited to an application to a diverse panel of nonstationary time series data and shed initial light on this question.