The effect of payment technology on narrow and broad money

This study examines the effect of financial innovation in the payment system on narrow and broad money demand function from 2007 to 2017 using Indonesia monthly data. This research was inspired by Rinaldi (2001), Columba (2009), Syarifuddin (2009), and Nagayusu (2012), who found that payment technology such as credit cards, debit cards, and Automatic Teller Machines (ATM) could affect demand for narrow and broad money. Moreover, the stability of velocity of money and money multiplier also tested and showed a stable result throughout the period of research, when there was significant increase of transaction in the payment system technology. Using Vector Error Correction Model (VECM) as a method, study revealed that tremendous development on the payment system in the last ten years, i.e., real-time gross settlement, clearing, Automatic Teller Machines (ATM)/debit cards, credit cards, and electronic money, using several proxies, decrease narrow money. On the other hand, results showed that payment technology using several proxies increases broad money because there is a substitution from narrow money to broad money whereby placing individual funds in a savings deposit (categorized as broad money) with real-time gross settlement, clearing, autodebit, and Automatic Teller Machine (ATM) facilities, individuals obtained a return (received from interest rate) and still enjoy the facilities, functions, and convenience such as narrow money.