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Digital effect: How E-money is changing the demand for cash in Indonesia

Author

Listed:
  • Rezki, Jahen F.
  • Justinus, Yoshua C.
  • Desdiani, Nauli A.
  • Adriansyah, Muhammad
  • Vandika, Rama
  • Muhammad, Haikal

Abstract

This paper examines the causal impact of e-money adoption on cash demand in Indonesia, an emerging economy where digital payments are expanding rapidly but cash remains widely used. Using a high-frequency provincial panel dataset, we address endogeneity in e-money adoption by employing a Bartik-style shift-share instrumental variable approach. We find clear evidence of substitution: a 1% increase in e-money transactions is associated with a 1.7% decline in cash demand. This effect is substantially stronger in more urbanized and digitally advanced provinces in the Java region, indicating persistent regional disparities. Evidence from cash denominations shows that substitution is concentrated among small-to medium-value banknotes typically used for everyday transactions, while coins remain largely unaffected. This study has important implications for monetary policy, particularly for managing the money supply and setting policy rates in an increasingly cashless economy, as well as for promoting targeted digital inclusion initiatives.

Suggested Citation

  • Rezki, Jahen F. & Justinus, Yoshua C. & Desdiani, Nauli A. & Adriansyah, Muhammad & Vandika, Rama & Muhammad, Haikal, 2026. "Digital effect: How E-money is changing the demand for cash in Indonesia," Economic Modelling, Elsevier, vol. 162(C).
    • Handle: RePEc:eee:ecmode:v:162:y:2026:i:c:s0264999326001653
    DOI: 10.1016/j.econmod.2026.107636
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    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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