INFORMATION TECHNOLOGY FOR DEVELOPMENT

https://doi.org/10.1080/02681102.2023.2244465

Does digital payment induce economic growth in emerging

economies? The mediating role of institutional quality,
consumption expenditure, and bank credit
a
Biswajit Patra and Narayan Sethib
a
Department of Economic Sciences, Indian Institute of Science Education and Research (IISER) Bhopal, Bhopal,
India; bDepartment of Humanities and Social Sciences, National Institute of Technology Rourkela, Rourkela, India

ABSTRACT KEYWORDS
This paper analyzes the direct and interactive effect of digital payments Digital payment; economic
through institutional quality, consumption expenditure, and bank credit growth; institutional quality;
on economic growth for 25-member countries of the Committee on consumption expenditure;
bank credit
Payments and Market Infrastructures (CPMI) for 2012–2020. Using the
Fixed Effect with Driscoll-Kraay Panel Corrected Estimators, it finds that Subject classification codes:
a rise in digital payments positively impacts economic growth. The G21; O43; E21; E51
interaction effect of digital payments with other variables does not
promote economic growth. To address differences among the selected
countries and to have a robust analysis, the paper classified the
selected countries into quantiles based on the GDP per capita level
using the Bootstrapped Panel-Quantile Regression (BPQR) method. The
BPQR confirms the positive relationship among digital payments,
institutional quality, and consumption expenditure with economic
growth, whereas credit impacts it negatively. Control variables, such as
inflation, exchange rate, health, and unemployment, behave as per
economic theories related to economic growth.

1. Introduction
The world is experiencing developments in digital space. There are many recent trends in the digital
space, such as automation, digital banking, artificial intelligence, 5G, and mobile payment systems.
The integrations of this bring the digital economy. The financial markets are the great beneficiaries of
this digital evolution. The world has experienced a continuous rise in the use of digital technology in
the payment systems of the financial markets (Hartmann, 2006; Rahman et al., 2020). There is a con-
tinuous thrust by the governments of many parts of the world to enhance the cashless economy
from the use of physical cash one. As per the latest data published by the Bank for International
Settlements (BIS), Sweden has the lowest banknotes and coins in circulation (around 1%) among
the member countries of the Committee on Payments and Market Infrastructures (CPMI) as a percen-
tage of their gross domestic product (CPMI Brief No 1, 2023). Many other countries, such as Norway,
Canada, Australia, France, Finland, Denmark, the US, and the UK, are front runners for a maximum
cashless economy (Srouji & Torre, 2022).
Any financial innovation or development has an impact on the economic growth of countries
(McKinnon, 1973; Schumpeter, 1911). The developments in digital space have an impact on
financial markets and the economic development of countries (Jorgenson et al., 2003; Nasab &

CONTACT Biswajit Patra biswajitpatra@iiserb.ac.in Department of Economic Sciences, Indian Institute of Science Edu-
cation and Research (IISER) Bhopal, Bhopal, Madhya Pradesh 462 066, India
Paulo Rupino de Cunha is the accepting associate editor for this paper.
© 2023 Commonwealth Secretariat
2 B. PATRA AND N. SETHI

Aghaei, 2009; Seo et al., 2009). The digital payment system is one such innovation in the digital
economy which has affected major economic activities like consumption and credit or lending in
the economy. These digital payments system influences the consumption activity of people as
they find it easy and convenient to spend with the help of their mobile phones. It ensures that all
the payments are initiated, processed, and received electronically, which is faster and safe (Hart-
mann, 2006). Consumers get a lot of advantages from digital payments as it is convenient and
faster and also help with the issues like theft and cash-related crimes (Rahman et al., 2020). Consu-
mers also benefit from digital payments like e-wallet, which is very convenient as the transactions
happen through mobile without using cash (Subaramaniam et al., 2020). These all denote those
digital payments significantly affect the consumption activity of the people. Previous studies also
reveal that digital payments are significantly linked with the credit in the system. It has influenced
the credit and lending activity in the economy. After the digital payments system has been in
place, there is a lot of credit and lending activity on digital platforms. It has led to the electronic
credit market where peer-to-peer (P2P) lending takes place between the borrowers and lenders
as the lenders bid to supply private loans after screening the potential borrowers electronically
(Berger & Gleisner, 2009). Likewise, small ticket size loans are easily given to customers through
digital payments. It leads to crowd-funding or crowd lending (Belleflamme et al., 2014). Digital
payment helps in easy credit disbursals and reduces the information asymmetry among banks
and their customers (Jin et al., 2020; Sheng, 2021). It also reduces transaction costs, enables funds
for small businesses, and increases financial inclusion (Barroso & Laborda, 2022). To understand
the linkage between digital payments, consumption expenditure, and credit, a trend analysis is pre-
sented in Figure 1 for the sample countries of the study. It indicates that there is a kind of direct
relationship between these variables, except for the year 2020, as the consumption expenditure
reduced significantly during this period. Previous research suggests that the economic growth of
countries got significantly influenced by consumption expenditure (Amin, 2011; Aslam, 2017; Haja-
mini & Falahi, 2014; Odhiambo, 2015) and credit in the economy (Akpansung & Babalola, 2011;
Arcand et al., 2015; Banu, 2013; Sassi & Gasmi, 2014). Further, digital payments reduce corruption
in the economy to a great extent and help in governments’ welfare measures implementation. A
more cashless economy could be a sign of better institutional quality, and a robust digital
payment system helps to increase the institutional quality of countries. On the other hand, a
better institutional setup promotes digital payments. Financial innovations like digital payments
could be more helpful in economic development if we have better institutional quality and good
governance (Huang & Ho, 2017; Islam & McGillivray, 2020; Emara & El Said, 2021). There are also
studies that explain the direct effect of digital payments on economic growth (Bech & Hobijn,

Figure 1. Trend of digital payments, bank credit, and consumption expenditure.

 INFORMATION TECHNOLOGY FOR DEVELOPMENT 3

2007; Rooj & Sengupta, 2020). From the above discussion, it paves the thought that there could be
both direct and indirect effects of digital payments on the economic growth of countries. However, it
is difficult to segregate digital payments’ direct and indirect effects on economic growth. In view of
these, the present paper tries to examine the direct effects of digital payments on economic growth
and further analyses the interactive effects of digital payments through institutional quality, con-
sumption expenditure, and credit.

1.1. Previous related works

The digital economy plays a greater role in the financial and economic development of countries (Jor-
genson et al., 2003; Nasab & Aghaei, 2009; Seo et al., 2009). Vu (2011) examined the impact of Information
and Communication Technology (ICT) on economic growth and found that the use of innovation in the
financial world reduces cost and increases productivity and growth. Similarly, Pradhan et al. (2019) exam-
ined the impact of digital innovation on economic growth and found a positive link between the two in
European countries. Further, Cheng et al. (2021) analyzed the cross-countries across the world and noted
that information technology and innovation positively influence growth. They found that the impact is
more significant in the case of developed countries in comparison to low and middle-income countries.
On the other hand, some studies advocate that a digital economy has no effects on the economic growth
of countries, and it is costlier for less developed countries (Aker & Mbiti, 2010; Albiman & Sulong, 2017;
Dewan & Kraemer, 2000; Lee et al., 2005). Ishida (2015) investigated the impact of ICT on Japan’s
economy and found that investment in ICT has not helped in increasing the growth of the country. Infor-
mation technology does not impact favorably the growth of the lower-income group countries (Yousefi,
2011). Still, there is diversity in opinion on whether digital innovation substantially helps economic
growth. Further, Pradhan et al. (2019) found that information technology helps in the development of
venture capital in the case of European countries. The digital payment system is very helpful to
venture capital. The development of venture capital helps to foster economic growth (Samila & Sorenson,
2011; Schwartz, 1994; Vladimirovich et al., 2015).
The digital payment system is one of the important parts of the digital economy. The impacts of digital
payments on economic growth have been less studied in the literature. The digital payment system is
one of the most popular instruments of the fintech, which is used by people (Palmié et al., 2020).
Fintech, which mainly works for the digital payments of banks and financial institutions, helps in reducing
risk for the banks on payment. It helps to reduce the information asymmetry between the banks and
customers (Jin et al., 2020). Mobile money, which is a part of the digital payments system, helps to
reduce the transaction costs for the bank and its customers. It helps to pass the information easily
(Castri Di & Plaitakis, 2017). Sheng (2021) studied the impact of digital payments through fintech on
small and micro enterprises (SMEs) borrowers of commercial banks. They found that the supply of
credit to the system has increased with this digital financial system which helps in economic develop-
ment. On the other hand, there are studies that tell that digital payment platforms like cryptocurrency
foster illegal activities (Foley et al., 2019). Further digital innovations in the financial services industry
could have a negative impact if huge investments are not made by the industry (Chen et al., 2019).
The Information and communications technology (ICT) helps in improving the digital literacy
among the people and which may further help in the economic growth of the economies. The
use of mobile phone as a digital aid for banking may influence the economic growth. There have
been discussions on how the use of mobile helps in the economic growth (Qureshi, 2013).
Further, Qureshi and Najjar (2017) found that ICT influenced the GDP per capita for the economies
of small islands. Recently, there has been a growing literature on the adoption of digital currency
(Cunha et al., 2021; Ngo et al., 2023; Xin & Jiang, 2023). Barrdear and Kumhof (2016) found that if
CBDC is issued to the tune of 30% of GDP, it could enhance the GDP by around 3% for the US. It
shows that digital payments can impact the economic growth of nations.
From the above literature, we found that digital payments have both direct and indirect effects on
economic growth. Although there are studies across the world linking fintech and financial innovation
4 B. PATRA AND N. SETHI

with economic growth, there is still a paucity of literature on this area. The study of linking digital pay-
ments with economic growth is very limited. To the best of our knowledge, we could not find any sig-
nificant study in this area. There are few works of literature that try to see the direct impact of digital
payments on economic growth (Bech & Hobijn, 2007; Rooj & Sengupta, 2020). However, the study of
the interaction effect of digital payments with other relevant parameters is limited in nature, although
it is widely studied in other financial and macroeconomic literature. Further, the study of non-linear
relations between digital payments and other relevant parameters is very recent in this area. It will
add to the existing literature. Lastly, using the CPMI member countries’ data in the BIS database
and using the recent data for countries across the world are new in this area.
The research objective of this study is as follows. First, to analyze the impact of digital payments
on economic growth by using the panel data models comprising the latest data of 25 emerging
economies. Secondly, to examine the impact of digital payments with other relevant parameters
like institutional quality, consumption expenditure, and bank credit on economic growth. Macro par-
ameters like inflation, exchange rate, life expectancy, and unemployment rate are also used as the
control variables for this study. The paper has gone through a series of pre diagnostic checks for
finalizing the econometric models for the empirical analysis. The tests such as autocorrelation,
multi-collinearity, heteroscedasticity, and cross-sectional dependence tests have been considered
for the analysis. Results of the tests show that there is the presence of issues such as autocorrelation,
group-wise heteroscedasticity, cross sectional dependence among the member countries. The test
results for multi-collinearity indicate that there is no serious multi-collinearity within the variables
under study. To address the issues noticed in the diagnostics checks, the present paper uses the
non-parametric method, that is, the fixed effects (FE) model with Driscoll Kraay standard errors (Dris-
coll & Kraay, 1998) for the regression analysis. Further, the paper has used the Bootstrapped Panel-
Quantile Regression (BPQR) method for the robust analysis. This model has the advantage as it con-
siders the differences among the selected countries and classifies them into lower quantile, medium
quantile, and higher quantile based on the GDP per capita level. This helps in understanding how the
relationship among the studied variables changes for different groups of economies.
From the analysis, we note that digital payments positively impact economic growth in emerging
economies. The mediating impact variable, generated by the interaction of digital payments through
institutional quality, is not a statistically significant variable that influences economic growth. Similar
observations are also noted for the interaction variables for digital payments through consumption
expenditure and digital payments through credit. However, these variables, without interaction,
influence economic growth significantly. This implies that digital payments can directly push the
economic growth of economies, and governments should give thrust on the development of
digital payment systems in the economy. This robust analysis through BPQR results also confirms
the same that digital payments influence GDP per capita positively for the different quantiles of
economies. Credit growth is noted to have a negative influence on the GDP per capita of economies.
Interestingly, life expectancy at birth influences GDP per capita positively for the low-middle quantile
classified economies and negatively for upper-quantile countries. This implies life expectancy nega-
tively impacts richer economies. Further, this paper also has some insightful information regarding
other parameters that affect the economic growth of different income group countries.
The rest of the paper is presented as follows. Section 2 discusses the review of the literature on
the captioned topic. The theoretical background of this paper and the formation of the hypothesis
are discussed in section 3. Section 4 discusses the data and methodology used in this paper. The
empirical analysis and discussions are presented in section 5, and finally, section 6 contains the con-
clusions and policy suggestions of the paper.

2. Theoretical background and research hypotheses

Financial developments like digital payments can impact the economic growth of countries. The theor-
etical background of this study can be linked to the studies by Schumpeter (1911) and McKinnon (1973),
 INFORMATION TECHNOLOGY FOR DEVELOPMENT 5

where new changes in the financial service industry can upgrade production activity and enhance
growth for the country. The digital payments system has brought significant change to the financial
industry. Many empirical studies in the past confirm the positive relationship between financial devel-
opment and economic growth (King & Levine, 1993; Levine & Zervos, 1998). The digital payment
systems could both directly and indirectly impact the country’s economic growth. It helps to reduce
the transaction costs, easy transfer of funds, credit flows to the systems, and increase the productivity
of the nation, hence directly impacting the economic progress of the country. Further, the rise of digital
payments could reduce corruption, increase consumption behavior, increase the use of utility services,
and improve institutional quality, which could indirectly impact economic growth. The direct and indir-
ect effects of digital payments on economic growth are presented schematically in Figure 2.
Figure 2 shows how digital payments could impact the economic progress of the countries. The
arrows indicate the direct impact of digital payments on economic growth. They also show the indir-
ect impact of digital payments through institutional quality, consumption expenditure, and credit on
economic growth. The hypotheses of the present study, which are based on the previous literature
and the above discussions, are mentioned below.

2.1. Hypotheses of the study

The financial sector developments like digital payments could significantly impact the output, prices,
and monetary policy transmission in the country. This can impact the growth of the country.
However, there are limited studies in this area to examine this (Rooj & Sengupta, 2020). The
financial sector facilitates providing a better payment system which reduces transaction costs and
increases the trading and economic activities in the economy (Bech & Hobijn, 2007). This will increase
the growth of the economy. The central bank of each country promotes digital payments, and they
are working around the corner for smooth transactions and settlements of funds, even for small
value transactions (Bech & Hobijn, 2007). This will help in increasing the economic activity and
growth in the country. In view of the above, we examine whether digital payments help in increasing
the economic growth of the countries. This led to the following hypothesis.
Hypothesis 1. The digital payments system helps in increasing economic growth.

Financial developments and economic growth are positively related. However, it requires good insti-
tutions in terms of rules and regulatory quality, political stability, government effectiveness, and

Figure 2. The direct and indirect effects of digital payment system on economic growth. CLP*CON – Interaction between digital
payment system and consumption expenditure, CLP*CRD – Interaction between digital payment System and credit, CLP*IQI –
Interaction between digital payment system and institutional quality index.
6 B. PATRA AND N. SETHI

control of corruption. Economic growth can be better achieved when we have financial develop-
ment backed by good governance (Emara & El Said, 2021). Economic inequality reduces the
growth of the economy. However, good governance helps in mitigating the negative impact of
economic inequality in the country (Islam & McGillivray, 2020). Huang and Ho (2017) studied the
link between governance and economic growth in Asian countries and noted that governance in
terms of the rule of law and government effectiveness promotes economic growth. Digital payments
promote direct benefit transfer, easy implementation of welfare policies, and reduce corruption. The
calculated index derived from world governance indicators (WGI) comprising six indicators is con-
sidered as the proxy for the institutional quality index (IQI). Given the above, we examine
whether the interaction of digital payments and institutional quality impact the economic growth
of the countries. The hypothesis 2 tests the same.
Hypothesis 2. The interaction of digital payments and better institutional quality increases economic growth.

Consumption expenditure is one of the major indicators of the economic performance of countries.
Aslam (2017) made an empirical analysis for Srilanka and found that consumption expenditure posi-
tively impacts economic growth. There are studies that have studied the interlinkage between con-
sumption expenditure and economic growth (Amin, 2011; Hajamini & Falahi, 2014; Odhiambo, 2015).
Digital finance played a positive role in increasing consumption expenditure during the post-pan-
demic, which helped countries to pick up the pace and come out of the downturn (Li et al.,
2022). The digital payment system influences the consumption expenditure of the countries. It is
observed that digital payments have increased the spending of people as it is easy and available
on mobile phones. The following hypothesis aims to test whether the interaction of digital payments
with consumption expenditure positively impacts economic growth.
Hypothesis 3. The interaction of digital payments and consumption expenditure increases economic growth.

The credit flows in the system show the trend of the economic activity of the countries. It plays a
significant role in countries’ economic growth. There is a wide range of literature that discusses
the relationship between credit and economic growth (Akpansung & Babalola, 2011; Arcand et al.,
2015; Banu, 2013; Sassi & Gasmi, 2014). The effect of bank credit remains positive and significant
for the economic growth of the countries up to a threshold, and the effect remains positive but
not significant (Ho & Saadaoui, 2022). Digital payments help in the easy disbursal of credit and
reduce the information asymmetries between banks and customers (Jin et al., 2020). Sheng (2021)
found that digital payments through fintech help in the supply of credit to small and micro enter-
prises (SMEs) borrowers of commercial banks. He found that the supply of credit to the system
has increased with this digital financial system which helps in economic development. Given the
above, the hypothesis 4 tries to test whether credit positively affects economic growth. The hypoth-
eses are tested through the empirical models discussed in the next section.
Hypothesis 4. The interaction of digital payments and bank credit in the system increases economic growth.

3. Data and model framework

We analyze the impact of digital payments -- measured in terms of average cashless payments per
inhabitant (CLP) -- on economic growth -- measured in terms of the GDP per capita. The GDP and CLP
are per capita variables. The other explanatory variables, such as the institutional quality index (IQI) is
an index variable computed from six indicators of world governance; consumption expenditure
(CON) is the total final consumption expenditure for the respective countries; credit is the total
credit to non-financial sectors. The natural log transformation is considered for GDP, cashless pay-
ments, consumption, and credit. The other control variables, such as CPI inflation is the year-on-
year inflation rate for the respective countries, the exchange rate is the official currency exchange
rate with respect to USD for the respective countries. Life expectancy at birth and unemployment
 INFORMATION TECHNOLOGY FOR DEVELOPMENT 7

rate represent the life expectancy and unemployment percentage level for the respective countries.
The study has been conducted on the Bank for international settlement (BIS) database of the Com-
mittee on payments and market infrastructures (CPMI) member countries. There are 25 member
countries data comprising Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany,
India, Indonesia, Italy, Japan, Korea, Mexico, Netherlands, Russia, Saudi Arabia, Singapore, South
Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States. The study
period is 2012–2020 (see Appendix Table A1). The empirical models examined in this study are
based on the hypothesis discussed above. The selection of the variables is based on the existing lit-
erature and is of interest to this specific study. The variables such as institutional quality index, con-
sumption expenditure, and credit are taken to check the mediating impact of these variables with
digital payments. The inflation, exchange rate, life expectancy, and unemployment rate are taken
as the control variables in the analysis to see their impact on growth. A detailed explanation of
the variables is presented in Table 1.
The digital payments system plays a role in transmitting welfare payments directly to the ben-
eficiaries and it reduces corruption and brings good governance (Setor et al., 2021). Further, the
faith and stability of the digital payment system depend upon the quality of the institutions of the
country (Akanfe et al., 2020). The digital payments system is also linked with the consumption
expenditure and credit of the nation. It impacts the spending and consumption expenditure (Li
et al., 2022). Fast and easy disbursal of loans happens through digital payments. It reduces the
transaction cost (Castri Di & Plaitakis, 2017) and increases the production activity in the
economy (Vu, 2011). Hence, the interaction effects of digital payments with institutional quality,
consumption expenditure, and credit are analyzed in this study. The summary statistics of the vari-
ables are presented in Table 2.
In Table 2, it is observed that there is high volatility for all the variables under study, as evidenced
by the standard deviation. The difference between the minimum and maximum is also noted to be
high. The general skewness and kurtosis normality test and further semi-parametric normality tests
like Shapiro–Wilk and Shapiro-Francia tests have been conducted to check the normality of the data.
The probability value of these tests confirms that all the variables do not follow the normal distri-
bution. The histogram of the dependent variable GDP per capita also shows the same (see Appendix
Figure A1). The high standard deviations are mainly due to lack of normality in the dataset.
Further, the empirical models are estimated based on the following regression equations.

GDPit = a0 + a1 CLPit + a2 IQIit + a3 CONit + a4 CRDit + a5 Xit + 1it (1)

Table 1. Description of the variables.

Indicator name Label Data source
Dependent variable
GDP per capita GDP Bank for International Settlements (BIS) Statistics (March 2022)
Independent variable
Average value of Cashless payments per CLP Bank for International Settlements (BIS) Statistics (March 2022)
inhabitant
Institutional Quality Indexa IQI Computed from Worldwide Governance Indicators (WGI) project (World
Bank, 2022)
Final consumption expenditure CON World Development Indicators (World Bank, May 2022)
Total Credit to non-financial sector CRD Bank for International Settlements (BIS) Statistics (February 2022)
CPI inflation CPI Bank for International Settlements (BIS) Statistics (March 2022)
Exchange rate ER Bank for International Settlements (BIS) Statistics (March 2022)
Life expectancy at birth LE World Development Indicators (World Bank, May 2022)
Unemployment Percentage UR World Development Indicators (World Bank, May 2022)
For GDP, Cashless payments, credit, and consumption expenditure the natural logarithm is considered for estimation.
a
Computed Index (through PCA) of six Worldwide Governance Indicators: (i) Voice and Accountability, (ii) Political Stability and
Absence of Violence/Terrorism, (iii) Government Effectiveness, (iv) Regulatory Quality, (v) Rule of Law, and (vi) Control of
Corruption.
 8
B. PATRA AND N. SETHI
Table 2. Descriptive statistics.
Variable GDP CLP IQI CON CRD CPI ER LE UR
Mean 32894 383623 0.00 1952 6430 3.54 567 78 7.57
Std. Dev. 22057 426700 2.29 3098 10837 6.16 2524 5 5.37
Min 1507 1740 −3.93 136 320 −2.10 0.61 60 2.40
Max 89740 1927309 3.15 17403 61893 52.80 14563 85 29.22
Shapiro-Wilk Prob 0.0000 0.0000 0.0000 0.0000 0.0001 0.0000 0.0000 0.0000 0.0000
Shapiro-francia Prob 0.00001 0.00001 0.00001 0.00011 0.00049 0.00001 0.00001 0.00001 0.00001
Skewness Normality Prob 0.0026 0.0000 0.2279 0.0000 0.0108 0.0000 0.0000 0.0000 0.0000
Kurtosis Normality Prob 0.0078 0.0000 0.0000 0.0023 0.0340 0.0000 0.0000 0.0000 0.0000
Obs 225 225 225 225 225 225 225 225 225
 INFORMATION TECHNOLOGY FOR DEVELOPMENT 9

GDPit = a0 + a1 CLPit + a2 CLPit2 + a3 IQIit + a4 CONit + a5 CRDit + a6 Xit + 1it (2)

GDPit = a0 + a1 CLPit + a2 CLPit2 + a3 CLP∗IQIit + a4 IQIit + a5 CONit + a6 CRDit + a7 Xit + 1it (3)

GDPit = a0 + a1 CLPit + a2 CLPit2 + a3 CLP∗CONit + a4 IQIit + a5 CONit + a6 CRDit + a7 Xit + 1it (4)

GDPit = a0 + a1 CLPit + a2 CLPit2 + a3 CLP∗CRDit + a4 IQIit + a5 CONit + a6 CRDit + a7 Xit + 1it (5)
where, i = 1, 2 … . N (for the country) and t = 1,2, … .. T (for the number of years). Equation (1)
shows the direct effect of cashless payments (CLP) on economic growth (GDP) with other expla-
natory and control variables. Equation (2) considers the non-linear specification of the model by
incorporating CLP2 of equation 1. Equation (3–5) are the extensions of equation (2) which con-
siders the interaction effect of cash less payments and IQI (CLP*IQI), cash less payments and con-
sumption expenditure (CLP*CON), and cash less payments and credit (CLP*CRD), respectively, in
the equations.

3.1. Econometric technique

The empirical estimations are preceded by several diagnostic checks for selecting the appropriate
techniques. As we have the non-normality in the dataset, we have used non-parametric estimation
methods. The diagnostics checks such as autocorrelation, multi-collinearity, heteroscedasticity, and
cross-sectional dependence tests have been carried out for analysis. The Wooldridge autocorrelation
test (Wooldridge, 2010) tells that the dataset exhibits an autocorrelation issue. The Wald test for
group-wise heteroscedasticity confirms the presence of heteroscedasticity problems in the error
terms. The Hausman test (Hausman, 1978) and Breusch–Pagan LM test (Breusch & Pagan, 1980)
advocate the presence of Fixed Effects in the model (see Appendix Table A2). The Cross-sectional
dependence between the error terms is also confirmed (see Table 4) through cross-sectional depen-
dence (CSD) tests (Frees, 1995; Friedman, 1937; Pesaran, 2021). The Multi-collinearity is tested using
the Variance Inflation Factor (VIF) technique, and it found that there is no serious multi-collinearity
issue among the variables (see Table 3).
The problems that emerged from the diagnostics checks, such as heteroscedasticity, autocorrela-
tion, and cross-sectional dependencies, are solved by using the fixed effects (FE) model with Driscoll
Kraay standard errors (Driscoll & Kraay, 1998). It is a non-parametric model which fixes these issues.
Further, the FE model with Driscoll Kraay standard errors can be used with the limited panel, as in the
present case. Following this, we have used the fixed effects (FE) model with Driscoll Kraay standard
errors for the estimations of the regression equations (1)–(5).
Afterward, we also examine the impact of CLP and other variables on GDP per capita using the
Bootstrapped Panel Quantile Regression (BPQR) techniques (Hahn, 1995). This technique is useful
when we have small samples for study, and it helps to mitigate the problems of outliers in the
dataset (Nikitina et al., 2019). It helps to analyze the impact of CLP on GDP per capita at different

Table 3. Multi-collinearity statistics.

Variable VIF 1/VIF
CLP 2.78 0.360129
IQI 3.48 0.287559
CON 12.51 0.079951
CRD 15.18 0.065886
CPI 1.66 0.601661
ER 1.49 0.673062
LE 3.66 0.272982
UR 1.31 0.765043
Mean VIF 5.26
10 B. PATRA AND N. SETHI

quantiles. The Westerlund panel cointegration test (Westerlund & Edgerton, 2007) has been carried
out to check the long-run cointegration among the CLP and GDP per capita. The results confirm the
presence of no cointegration among the variables (see Table 6).
The estimation of the FE model with Driscoll Kraay standard errors goes through the following steps
(Hoechle, 2007). First, all the variables of the model are within transformed by the equation (6) as men-
tioned below


Z it = zit −
zi + z
it (6)

Ti
where
zi = Ti−1 zit
t=ti1
Further, the OLS estimation below (Equation-7) gives within estimation
ỹit = x̃′it u + 1̃it (7)
The transformed model of equation (7) is estimated using the pooled OLS estimation with Driscoll
Kraay standard errors. This has the advantage as the Driscoll Kraay’s covariance matrix depends
upon the cross-sectional averages, and the disturbances are allowed to be autocorrelated, hetero-
skedastic, and cross-sectionally dependent. The estimated standard errors are consistent irrespective
of the panel’s cross-sectional dimension. The pooled estimates of u are given by

û = (x′ x)−1 x′ y (8)

Driscoll and Kraay’s standard errors for the coefficient estimates of equation 8 are taken as the
square roots of the diagonal elements of the asymptotic (robust) covariance matrix as mentioned
in equation 9 below,

V(û) = (x′ x)−1 ŜT (x′ x)−1 (9)

where ŜT , is as per the Newey and West standard error (Newey & West, 1987). These standard
errors fit well for cross-sectional and temporal dependencies. Further, the robustness is being
checked by using the BPQR model for the GDP per capita, indicating three different quantiles
based on GDP per capita level. Three quantiles are such that the 25th quantile indicates the
group of economies having lower GDP per capita within the selected sample, the 50th quantile
indicates the medium, and the 75th quantile indicates the higher levels of GDP per capita
group of economies from the selected sample of 25 countries. The BPQR model helps to generate
the regression for three quantiles differently based on the dataset. The heterogeneity among the
countries may provide different relations among the studied variables in the regression results.
Hence, the BPQR estimation is useful in providing different results from one dataset considering
the variability of the data concerned. The quantile regressions are useful when we have non-
normal distribution in the dataset. BPQR is selected for estimation as it helps when we have
group-wise heteroscedasticity in the residuals (Rogers, 1993).

4. Empirical findings
This section discusses the empirical analysis starting with diagnostics checks. First, the multi-colli-
nearity among the variables used in the estimation is checked. We use, the variance inflation
factor (VIF) to check the multi-collinearity issue among the variables. The VIF value increases as
the pairwise correlation between the variables increases. Table 3, presents the estimated results
of VIF. The mean value of VIF is around 5, which indicates that there is no serious problem with
regard to multi-collinearity among the variables. The VIF value beyond 10 creates an alarm for
multi-collinearity issues (Hair et al., 1995; Marquaridt, 1970; Mason et al., 2003).
After multi-collinearity, the cross-sectional dependencies between the variables are checked by
the cross-sectional dependence (CSD) tests given by Pesaran (2021), Friedman (1937), and Frees
(1995). Table 4 presents the results of CSD. The results indicate that the variables used in this
 INFORMATION TECHNOLOGY FOR DEVELOPMENT 11

Table 4. Cross section dependence test (CSD).

Statistics Estimate Prob.
Pesaran 9.347 0.0000
Friedman 38.901 0.0280
Frees 1.172 0.0000

analysis have CSD, as the null hypothesis of cross-sectional independence is being rejected due to
significant test statistics. This means that there are dependencies among the emerging countries
of the study. The shock in one country can have a transmitted impact in other countries of the
sample. Next, we check the second-generation panel unit root tests, such as CIPS and CADF to
check the stationarity of the variables. The results indicate that most of the variables are stationary
either level I(0) or at first order I(1) difference (see Table 5). Following this, given the GDP per
capita and CLP are found to be stationary at first-order difference; we test the long-run cointegra-
tion between GDP per capita and CLP by applying the Westerlund and Edgerton (2007) cointegra-
tion test. The results of the cointegration test in Table 6, indicate that there is no long-run
cointegration between these two as we have to accept the null hypothesis of no cointegration
between the variables.
Further, the equations (1-5) are estimated by using the FE Model with Driscoll Kraay standard
errors, and the results are reported under models (I) to (V) in Table 7. The FE Model with Driscoll-
Kraay standard errors is selected for the estimation of econometric equations as it helps to
correct the issues of autocorrelation, heteroscedasticity, cross-sectional dependence, and non-nor-
mality in the dataset.
In Table 7, the linear specification of the model, where CLP is used as the proxy for digital
payments, indicates that there is a positive and significant relationship between the GDP per
capita and digital payments (Model I). It indicates that digital payments increase the GDP per
capita. This finding is in line with existing studies (Bech & Hobijn, 2007; Daud & Ahmad, 2023;
Melo et al., 2023; Pradhan et al., 2019; Rooj & Sengupta, 2020). Further, the relation between
the institutional quality index (IQI) and GDP per capita was noted to be positive; however, it is
not statistically significant. The existing studies (Banerji & Humphreys, 2003; Emara & Chiu,
2016; Emara & El Said, 2021) noted that the composite governance and institutional qualities
positively impact economic growth. The consumption expenditure and credit significantly
impact the growth. The relation between consumption expenditure and growth is noted to be
positive; however, it is negative for credit. It means that the rise in consumption expenditure
increases the GDP per capita; however, the rise in credit negatively impacts the GDP per

Table 5. Results of Panel unit root tests (CIPS and CADF).

CIPS CADF
Variables I(O) I(1) I(O) I(1)
GDP −1.478 −2.575* −0.753 2.610
CLP −2.785* −3.335* −2.246** 2.350
IQI −1.281 −2.164 −2.510* 2.930
CON −1.562 −2.480** −1.504 2.160
CRD −1.175 −3.026* −0.640 2.323
CPI −1.962 −1.830 −2.538* 2.512
ER −1.854 −2.21*** −1.116 2.669
LE −2.214*** −2.514** −1.956 2.214
UR −1.290 −2.071 −1.587 2.342

Table 6. Westerlund panel cointegration test.

Test statistics p-value
0.9421 0.1731
12 B. PATRA AND N. SETHI

Table 7. FE model with Driscoll-Kraay standard errors.

Dependent variable: GDP
Variables I II III IV V
CLP 0.0454* −0.1514* −0.2414*** −0.0903* −0.0830*
(0.000) (0.000) (0.066) (0.001) (0.000)
CLP2 0.0086* 0.0123** 0.0115* 0.0179*
(0.000) (0.030) (0.000) (0.000)
IQI 0.0094 0.0083 0.0987 0.0103 0.0130
(0.379) (0.396) (0.427) (0.338) (0.254)
CON 0.9142* 0.9255* 0.9163* 1.1402* 0.9159*
(0.000) (0.000) (0.000) (0.000) (0.000)
CRD −0.1498* −0.1572* −0.1600* −0.1500* 0.3053*
(0.001) (0.002) (0.002) (0.001) (0.002)
CLP*IQI −0.0078
(0.445)
CLP*CON −0.0184*
(0.010)
CLP*CRD −0.0358*
(0.000)
CPI −0.0008*** −0.0008 −0.0009*** −0.0005 −0.0009***
(0.089) (0.120) (0.064) (0.197) (0.097)
ER −0.00001* 0.0000 0.0000 0.0000 0.0000**
(0.013) (0.818) (0.946) (0.988) (0.017)
LE −0.0160* −0.0133* −0.0133* −0.0129* −0.0139*
(0.000) (0.000) (0.001) (0.001) (0.000)
UR −0.0064* −0.0069* −0.0066* −0.0066* −0.0071*
(0.000) (0.000) (0.000) (0.000) (0.000)
Constant 5.6242* 6.4954* 7.1403* 5.2886* 4.2061*
(0.000) (0.000) (0.000) (0.000) (0.000)
Obserations 225 225 225 225 225
Countries 25 25 25 25 25
Notes: P values in parentheses; *, ** and *** are statistical significance at 1%, 5% and 10% levels, respectively.

capita for the selected countries. The positive relationship between consumption expenditure and
economic growth is also confirmed in earlier studies (Li et al., 2020, 2022). The result about the
relationship between credit and economic growth in the present study stood in contrast to earlier
studies (Ho & Saadaoui, 2022; Sheng, 2021) where rise in credit is shown to be positively affecting
economic growth. The rise in inflation (CPI), fall in currency value (ER), and rise in unemployment
(UR) negatively impacting the GDP per capita is justified by the economic theories. Further, life
expectancy (LE), the indicator of health infrastructure, has a significant negative relationship
with GDP per capita; however, the coefficients were found to be very small. The non-linear spe-
cification of the CLP is there in Model II. The non-linear coefficient is found to be significant and
positive; however, the coefficient is very small. The other variables have the same relation with
GDP per capita as noted in Model I, except CPI and ER, which became statistically insignificant
in Model II. Further, in Model III, we take the interaction variable digital payments with insti-
tutional quality (IQI*CLP), which was noted to be insignificant for this sample study; other vari-
ables behaved similarly. Likewise, in Model IV, we estimate the interaction effect of digital
payments with consumption expenditure (CLP*CON) on economic growth. The coefficient was
noted to be very low and negative, which indicates that the interaction effect of digital payments
and consumption expenditure slightly decreases the GDP per capita. Similarly, the interaction
effect of digital payments and credit decreases the GDP per capita; however, the coefficient
was noted to be very low (Model 7). It means that digital payments and consumption separately
impact the growth positively; however, the interaction effect is noted to have no significant effect
in promoting growth.
In the next step, we assess the impact of CLP across different quantiles (low, medium, and
high) on economic growth. We use the bootstrapped panel quantile regression (BPQR) for this
analysis. The GDP per capita at different conditional quantiles are taken as the dependent
 INFORMATION TECHNOLOGY FOR DEVELOPMENT 13

variables against independent variables such as institutional quality, consumption expenditure,

credit, inflation, exchange rate, life expectancy at birth, and unemployment rate. The quantile
regression is useful for us as we consider the effects that are not mean-dependent and are poten-
tially heterogeneous. This is also helpful when the number of cross-sections is small. Table 8 pre-
sents the estimated results of Bootstrapped panel quantile regressions, and Figure 3 shows the
panel quantile plots.
In the low GDP per capita economies given by the 25th quantile, increasing digital payments is
found to increase the GDP per capita significantly. Institutional quality and consumption expenditure
are also noted to have a significant and positive relationship with GDP per capita. The credit has
negative relation with GDP per capita, which means that a rise in credit reduces the GDP per
capita. The inflation, exchange rate, and unemployment rate are not significant variables that
impact the economic growth of low GDP per capita economies. However, life expectancy at birth
is one of the significant parameters that positively affect the GDP per capita. Further, the medium
and upper GDP per capita economies mentioned by (50th quantile and 75th quantile) have the
same kind of results. Digital payments positively and significantly influence the growth of
medium GDP per capita and high GDP per capita economies. The institutional quality and consump-
tion expenditure noted to have positive and significant coefficients indicate that a rise in institutional
quality and consumption expenditure increases the GDP per capita of these economies. The coeffi-
cient of credit shows that the rise in credit has negative relation to GDP per capita. Inflation,
exchange rate fall, and unemployment have a negative and significant relationship with GDP per
capita. This is as per economic theory. The life expectancy at birth is noted to have significant
and positive relations with GDP per capita as noted in the case of low GDP per capita economies.
It means that the rise in life expectancy increases the GDP per capita of all the three quantiles of
economies considered in the sample. In summary, digital payments positively affect the growth
of all the quantiles. The institutional quality and consumption expenditure also positively impact
the growth of all the quantile economies. Credit noted to have a negative relation with GDP per
capita for all the quantile economies.
The Figure 3 shows the panel quantile plots for the estimated variables for quantile up to 100 with
20 intervals. The results of the quantile plot note that the effects of digital payments on GDP per
capita were noted to be positive through all the quantiles. The quadratic effects of digital payments

Table 8. Bootstrapped panel quantile regressions.

Dependent variables: GDP
Lower quantile (25) Medium quantile (50) Higher quantile (75)
Variables I II I II I II
CLP 0.1785* 1.4755* 0.1190* 1.4330* 0.1534* 1.6176*
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
CLP2 −0.0551* −0.0524* −0.0629*
(0.000) (0.000) (0.000)
IQI 0.2001* 0.2605* 0.1970* 0.2239* 0.2220* 0.2539*
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
CON 0.0772* 0.2653* 0.1596* 0.1707* 0.2620* 0.4171*
(0.008) (0.000) (0.000) (0.000) (0.000) (0.000)
CRD −0.2206* −0.3288* −0.2952* −0.2708* −0.3263* −0.4579*
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
CPI 0.0023 0.0018** −0.0087* 0.0003* −0.0042* −0.0079*
(0.149) (0.049) (0.000) (0.360) (0.000) (0.000)
ER 0.0000* 0.0000* −0.0001* 0.0000* −0.0001* 0.0000*
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
LE 0.0854* 0.0571* 0.0635* 0.0457* 0.0501* 0.0508*
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
UR 0.0012 −0.0025* −0.0074* −0.0112* −0.0168* −0.0154*
(0.843) (0.004) (0.000) (0.000) (0.000) (0.000)
Notes: P values in parentheses; *, ** and *** are statistical significance at 1%, 5% and 10% levels, respectively.
14 B. PATRA AND N. SETHI

Figure 3. Panel quantile plots – shows the relation of the respective variables to the base variable – GDP per capita.

are positive up to 60 quantiles and diminish thereafter. Further, the impact of institutional quality on
GDP per capita remains negative up to 60 quantiles and becomes positive afterward. This shows that
institutional quality as a determinant of economic growth works positively for rich-income countries.
The consumption expenditure impacts the GDP per capita positively through all the quantiles.
However, the reverse is noted for credit, it affects the GDP per capita negatively through all the quan-
tiles. The rise in inflation, fall in the exchange rate and rise in unemployment rate negatively impacts
the growth. The rise in life expectancy at birth was noted to have a positive relationship with GDP per
capita up to 80 quantiles and falls thereafter. It shows that for super-rich economies, more spending
on health infrastructure decreases growth; however, for low and lower-middle group countries,
health infrastructure positively helps in growth.

5. Conclusions and policy suggestions

This paper tries to analyze the direct and interactive effects of digital payments on economic growth.
Digital payments are increasing significantly, and each country’s government focuses on being a
cashless economy and reducing the use of physical cash. Further, digital payments affect the con-
sumption expenditure and credit disbursal in the economy. The implementation of digital payments
depends upon the institutional quality. The digital payments are so linked with other discussed
factors that a separate study of the direct and indirect effects of digital payments on economic
growth is difficult. Hence, the impact of digital payments on economic growth was studied along
with institutional quality, consumption expenditure, and bank credit. From the estimated results
of the Driscoll-Kraay standard errors FE model, we got that digital payment significantly and posi-
tively impacts economic growth. This is in line with other studies in the existing literature (Bech &
Hobijn, 2007; Pradhan et al., 2019; Rooj & Sengupta, 2020). This advocates for accepting the hypoth-
esis1 of the study that digital payments help in economic growth. The estimated results show that
there is no significant relationship between institutional quality and economic growth, although the
coefficients are positive. This contradicts the earlier findings (Emara & El Said, 2021 Islam & McGilliv-
ray, 2020;) that better institutional quality improves economic growth. Further, the rise in the
 INFORMATION TECHNOLOGY FOR DEVELOPMENT 15

interaction between digital payments with institutional quality does not significantly increase econ-
omic growth. This rejects the hypothesis 2. The rise in consumption expenditure by itself increases
economic growth. This is in line with economic theories. It is also noted that the interaction effect of
digital payments through consumption expenditure helps to increase economic growth. This result
is consistent with existing literature (Li et al., 2022) and in line with the hypothesis 3. Further, the
bank credit, and interaction effect of digital payments through bank credit are noted to have a nega-
tive impact on economic growth. This contradicts the earlier findings (Ho & Saadaoui, 2022; Sheng,
2021) and rejects the hypothesis 4. The results of bootstrapped panel quantile regressions and panel
quantile plots help to provide more information on the low, medium, and high GDP per capita
countries. Digital payments affect economic growth positively for all the different quantiles of
countries. The institutional quality and consumption expenditure also positively impact the
growth of all the quantile economies; however, credit is noted to have negative relation for the
same. The inflation, exchange rate, and unemployment rate are not significant variables for the econ-
omic growth of low GDP per capita economies; however, they are significant for high-income
countries. The panel quantile plots indicate that, in the case of super-rich countries beyond 80 quan-
tiles, the rise in life expectancy at birth, an indicator of health infrastructure reduces the economic
growth and increases the economic growth for low-income countries. Overall, digital payments help
in economic growth, and government should continue to give more thrust to a cashless economy.
The interaction effects of digital payments with other relevant variables do not help in economic
growth. However, consumption expenditure and institutional quality independently help economic
growth. The rise in credit was noted to impact economic growth negatively. This may be due to very
aggressive lending by the banks without proper risk analysis. Hence, instead of aggressive lending by
the banks, prudent lending may be followed. Finally, this empirical research paper is subject to a few
limitations, like we considered GDP per capita as the only variable representing the economic
growth of the nations. There could be other indicators of growth for different economies. Further,
the study could not incorporate the most recent data and quarterly frequency data points due to
their unavailability for most of the variables considered under study.

Disclosure statement
No potential conflict of interest was reported by the author(s).

Funding
This research is part of the project work funded under an institute initiation grant by IISER Bhopal for the First Author
[grant number IISERB/R&D/2022-23/142].

ORCID
Biswajit Patra http://orcid.org/0000-0002-1685-7303

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Appendix

Figure A1. Histogram of GDP.

 INFORMATION TECHNOLOGY FOR DEVELOPMENT 19

Table A1. List of sample countries.

Argentina China Italy Russia Sweden
Australia France Japan Saudi Arabia Switzerland
Belgium Germany Korea Singapore Turkey
Brazil India Mexico South Africa United Kingdom
Canada Indonesia Netherlands Spain United States

Table A2. Results of diagnostic tests.

Tests Test Statistics P Value
Hausman-test 116.29 0.0000
Breusch Pagan LM test 685.48 0.0000
Wald test for groupwise heteroscedasticity 3952.94 0.0000
Wooldridge test for autocorrelation 11.246 0.0000