Macroeconomic impact of digital currency adoption: panel data econometrics with fixed effects in accounting system

This research intends to investigate empirically the implications of the growth of digital money on inflation, economic growth, and foreign exchange rate volatility at the state level in Malaysia. In doing so, a panel data model was constructed involving 16 states and territories from the year 2015 to 2024. The key explanatory variable in the regression model is the composite Digital Currency Acceptance Index (DCI), which consists of per capita volume of transactions made through digital wallets and internet penetration. This regression model has been estimated employing the fixed effect method along with robust clustered standard errors at the state level. According to the estimation results, a one-point increment in the acceptance index lowers the inflation by 1.82 percentage points and raises GDP growth by 1.94 percentage points. They both are significant at the 0.1% significance level. On the other hand, the impact of DCI on the foreign exchange rate (MYR/USD) volatility was found to be rather minor and insignificant. Robustness testing through alternative indices’ use with a one-year lag and using proxies like mobile payment transaction volume and electronic card payments corroborated the main results. The Hausman test also supported the superiority of fixed effects model over random effects in all cases. Such results have significant policy implications for monetary authorities as they indicate that digital payment systems’ construction will help achieve price stability and economic growth without the creation of foreign exchange volatility.

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