Digital Transactions, COVID-19 and Velocity of Money: Macroeconomic Insights from an Emerging Market

Abstract

Digital monetary transactions are revolutionizing the way economies operate by enabling faster, more efficient, and cost-effective methods of value exchange. These developments carry significant macroeconomic implications, notably for the velocity of money (VoM). Despite the growing literature on digital payments and macroeconomic variables, the interaction between digital transactions, monetary aggregates, and structural shifts such as the COVID-19 pandemic remains underexplored, especially for developing economies. This study investigates the impact of digital transactions and the COVID-19 pandemic on VoM in Turkey while accounting for a comprehensive set of macroeconomic variables. Employing an Autoregressive Distributed Lag (ARDL) model with bounds-testing, we find a stable and positive long-run relationship: a 1% increase in digital payments raises VoM by 0.3%. The COVID-19 pandemic has amplified this effect, as lockdowns and social distancing measures have accelerated the adoption of contactless transactions. Among digital banking activities, digital payments emerge as the primary drivers of increased VoM, surpassing money transfers and online credit card use. Moreover, digital banking influences the circulation of currency more than broader monetary aggregates, mainly by displacing physical cash. These results confirm that rising VoM driven by digitalization may require more dynamic and forward-looking liquidity management and closer monitoring of payment systems.