Digital payment systems’ impact on the economy and banking stability: The Indonesian case

Purpose — This study examines the impact of digital payment systems on the economy, including economic output and inflation, as well as banking stability, in Indonesia.Methods — This study uses the Vector Error Correction Model (VECM) and Johansen cointegration approaches to examine the dynamics of how digital payment systems affect the Indonesian economy and banking stability, using monthly time series data from 2008 to 2022.Findings — This study finds a cointegrating relationship between digital payment systems, the Indonesian economy, and banking stability. In addition, the use of debit and credit cards enhances economic output growth, accompanied by inflation driven by a higher velocity of money. Credit cards and the RTGS system also contribute to banking stability by smoothing credit distribution and mitigating risks within the banking system.Implication — This study suggests that the Central Bank should consider digital payment transactions as an indicator for formulating optimal monetary policy and include them in the banking stability risk-assessment monitoring framework.Originality — This study provides a comprehensive, instrument-level analysis of all digital payment systems in Indonesia and their long- and short-run effects on the economy and banking stability.