Impacts of third‐party payment in an open economy

Abstract Although the third‐party payment system is a matter of heated debate among academics and policymakers, and empirical studies of it are commonplace, this paper is believed to be the first to theoretically model its macroeconomic impact on a small open economy. The outcomes indicate that increases in the use of third‐party payments will have a positive effect on national income in such an economy, but an ambiguous effect on domestic interest rates if the Marshall‐Lerner condition holds. However, if the Marshall‐Lerner condition does not hold, then increases in third‐party payments could lead to higher domestic interest rates in an economy of this type. Additionally, third‐party payments will ambiguous effects on such an economy's foreign‐exchange rate.