Estimating the effects of electronic money on the income velocity of money in Indonesia

Abstract

This paper investigates the effects of electronic money, exchange rate, inflation, money supply, economic growth, and interest rate on the income velocity of money. We perform the Autoregressive Distributed Lag (ARDL) estimation for Indonesian data from 2009 to 2022 to examine the short-run and long-run estimations. The findings of this paper show that the income velocity of money requires 1.2 years of adjustment time to reach long-run equilibrium. We discover that electronic money and money supply have a considerable negative impact on the income velocity of money in the long term. Meanwhile, the interest rate, exchange rate, and economic growth have a significant positive effect on the income velocity of money in the long run. On the other hand, the findings indicate that in the short run, economic expansion and electronic money have a significant and positive impact on the income velocity of money. Whereas, inflation, interest rate, and money supply have a significant negative effect on the income velocity of money in the short run. Based on these findings, it is absolutely necessary for policymakers to encourage the use of electronic money to boost the income velocity of money and create a more efficient economy. A future study will likely employ cross-country data to compare the findings across samples of countries.