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Empirical examination of the role of fintech in monetary policy

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  • Muhammad Z. Mumtaz
  • Zachary A. Smith

Abstract

Over the past decade, technological innovations have changed the dynamics of the financial system. As a result, firms have used cellular phones, the Internet, and digital currencies to facilitate exchanges and operate their businesses. This course of action affects the transmission mechanism of monetary policy. The goal of the present study is to examine the role that fintech plays in the transmission mechanism of monetary policy. First, we analyse the income velocity and the money multiplier during pre‐fintech and post‐fintech periods. The results confirm that there is no change in income velocity and the money multiplier during these periods. Second, we develop the money demand function to examine the effect of monetary policy and demonstrate that low monetary policy rates lead to an increase in money demand. When we introduce fintech components to examine their impact on money demand, we find that mobile and Internet technologies and all digital currencies considered in this study are robust predictors of money demand. Third, we analyse the product market equation and report that after the initiation of fintech, monetary policy has a significant effect. To examine the cost function, we incorporate fintech components and identify that cellular phones, Internet technology, Litecoin, and Ethereum are the determinants of the output gap. Finally, we examine the drivers of fintech and determine that the real interest rate, GDP, inflation, the financial development index, and stock market indices are significant determinants of fintech.

Suggested Citation

  • Muhammad Z. Mumtaz & Zachary A. Smith, 2020. "Empirical examination of the role of fintech in monetary policy," Pacific Economic Review, Wiley Blackwell, vol. 25(5), pages 620-640, December.
    • Handle: RePEc:bla:pacecr:v:25:y:2020:i:5:p:620-640
    DOI: 10.1111/1468-0106.12319
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    1. Oliver Werth & Davinia Rodríguez Cardona & Albert Torno & Michael H. Breitner & Jan Muntermann, 2023. "What determines FinTech success?—A taxonomy-based analysis of FinTech success factors," Electronic Markets, Springer;IIM University of St. Gallen, vol. 33(1), pages 1-22, December.
    2. John Beirne & Nuobu Renzhi & Ulrich Volz, 2023. "Non-Bank Finance and Monetary Policy Transmission in Asia," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 59(6), pages 1976-1991, May.
    3. Wang, Lei & Sha, Yifan & Ding, Lili & Zhao, Zhongchao, 2024. "Risk mitigation strategies in urban investment bonds: Insights from local government implicit debt governance," Structural Change and Economic Dynamics, Elsevier, vol. 70(C), pages 607-618.

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