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Gauging the Impact of Payment System Innovations on Financial Intermediation: Novel Empirical Evidence from Indonesia

Author

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  • Alexander Lubis
  • Constantinos Alexiou
  • Joseph G. Nellis

Abstract

In this article, the relationship between innovations in the payment systems and financial intermediation is explored. By focusing on excess reserves and currency demand we provide evidence on the extant transmission mechanism. In this direction, a generalised method of moments (GMM) and vector error correction model (VECM) techniques are applied to a data set collated for Indonesia. We find that financial intermediation is affected by currency demand while we observe a limited role of excess reserves affecting financial intermediation. Credit card payments are found to have a statistically significant effect on currency demand, whereas debit card payments only influence financial intermediation in the long run. In addition, the real-time gross settlement (RTGS) exerts an upward pressure on excess reserves. The findings are of great importance as they provide support to policies that favour payment migration to an electronic platform, particularly that of card-based payment systems. JEL Classification: E42, E58, N25, G21

Suggested Citation

  • Alexander Lubis & Constantinos Alexiou & Joseph G. Nellis, 2019. "Gauging the Impact of Payment System Innovations on Financial Intermediation: Novel Empirical Evidence from Indonesia," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(3), pages 290-338, December.
    • Handle: RePEc:sae:emffin:v:18:y:2019:i:3:p:290-338
    DOI: 10.1177/0972652719846312
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    More about this item

    Keywords

    Payment systems; financial intermediation; excess reserves; currency demand; monetary policy;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • N25 - Economic History - - Financial Markets and Institutions - - - Asia including Middle East
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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