Digital Payments and Monetary Policy Transmission

Abstract

We examine the impact of digital payments on the transmission of monetary policy by leveraging administrative data on Brazil’s Pix, a digital payment system. We find that Pix adoption diminished banks' market power, making them more responsive to changes in policy rates. We estimate a dynamic banking model in which digital payments amplify deposit demand elasticity. Our counterfactual results reveal that digital payments intensify the monetary transmission by reducing banks' market power – banks respond more to policy rate changes, and loans decrease more after monetary policy hikes. We find that digital payments impact monetary transmission primarily through the deposit channel.

Presented at: SFS Cavalcade, HEC Banking in the Age of Challenges, European Finance Association, Global Poverty Research at Kellogg Conference, Northern Finance Association*

*denotes presentation by co-author