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Asymmetric threshold effects of digitization on inflation in emerging markets

Author

Listed:
  • Noha Emara

    (Rutgers University)

  • Daniela Zecheru

    (Barnard College, Columbia University)

Abstract

This paper analyzes the dynamic asymmetric effects of digitization on domestic inflation for a sample of 54 advanced economies (AEs) and emerging markets (EMs) over the period 2004–2018. Using Katz and Calorda’s Digital Ecosystem Development Index and employing the system Generalized Method of Moments (GMM) estimation methodology, the results of the paper reveal that the improvement in digitization has a statistically significant nonlinear deflationary effect with an exact threshold level of 43.22 points, that is, that the marginal effect of the digital penetration is larger when its level is lower than the threshold level. For EMs, with a level of digitization below the average of our full sample, policymakers must continue to invest in and expand on their digital ecosystem until the threshold level is achieved. Our results show that investment in human capital and improvement in governance can reinforce these deflationary effects. Hence, to obtain the maximum positive impact of increasing digitization on domestic inflation, EM governments should focus on maximizing school enrollment, controlling corruption, establishing rule of law, protecting the right to freedom of opinion and expression, and implementing accountability measures.

Suggested Citation

  • Noha Emara & Daniela Zecheru, 2024. "Asymmetric threshold effects of digitization on inflation in emerging markets," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-32, December.
    • Handle: RePEc:spr:fininn:v:10:y:2024:i:1:d:10.1186_s40854-023-00545-8
    DOI: 10.1186/s40854-023-00545-8
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    More about this item

    Keywords

    Inflation; Digitization; System GMM; Advanced economies; Emerging markets;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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