Is the Impact of Digitization on Domestic Inflation Non-Linear? The Case of Emerging Markets

This paper analyzes the impact of digitization on domestic inflation for a sample of 54 advanced economies (AEs) and emerging markets (EMs) over the period 2004-2018. Using System Generalized Method of Moments (GMM) estimation methodology, the study confirms a non-linear deflationary effect of the improvement in digitization, with the highest deflationary derived from the digital infrastructure and factors of digital production. Additionally, our results show that these deflationary effects are smaller in EMs versus the full sample, however, these effects are reinforced by the investment in human capital and the improvement in governance. Our policy recommendations for the full sample are directed towards expanding network coverage, increasing fixed and broadband download speed, boosting telecommunications, as well as strengthening intellectual property rights, and incentivizing innovation and patenting. In addition, for EMs, policy priorities should focus on maximizing school enrollments, controlling corruption, rule of law, and voice and accountability measures to recoup the maximum benefits of the improvement in digitization on domestic inflation