Does digital payments matter in monetary policy? Evidence from Malaysia

Over the past few decades, the global adoption of digital payment methods has increased substantially. While the impacts of digital payment on economic performance have been widely examined in the literature, their influence on the traditional money creation process has largely been ignored. This study argues that digital payment influences currency and excess reserve ratios, thereby affecting the money creation process. By employing the ARDL approach and monthly data spanning from 2019 to 2023, this research addresses this important issue in the Malaysian banking system. The findings reveal that digital payment significantly impacts the banks’ lending capacity, however, this effect is observed exclusively among domestic banks, including both commercial and Islamic banks. This finding underscores the importance of integrating digital payment activities into the design of monetary policy to enhance its overall effectiveness. Furthermore, the study highlights the need to acknowledge the role of Islamic banks in the money creation process.

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