Does financial digitalization affect macroeconomic stability in Indonesia? An application of the autoregressive distributed lag (ARDL) model

Abstract

Digitalization has transformed the monetary system more radical for many years. This study aims to investigate the effect of digital payments on macroeconomic stability. Electronic money is used as a proxy for digital payment. The macroeconomic stability is calibrated using exchange rate volatility and inflation rate. This study uses monthly data ranging from January 2009 to March 2020. Macroeconomic data were collected from the Indonesian Central Bureau of Statistics and the Organisation for Economic Co-operation and Development. Industry and market data from the Central Bank of Indonesia (Statistic of Bank Indonesia) and the Indonesian Stock Exchange (IDX). The data were analyzed using the Autoregressive Distributed Lag (ARDL) to examine the long-run and short-run relationship between the studied variables. This study found that digital payments affect Indonesian macroeconomic stability. Electronic money as a proxy of digitalization has a positive and significant relationship with exchange rate volatility and inflation. Cross-border e-commerce might induce exchange rate volatility due to its convenience as a one-stop shopping service and its lower switching cost of currency. The driver of higher inflation is electronic money, which increases people's spending, thus increasing the velocity of circulation and total consumption.