Digital finance and monetary policy efficiency: what are the effects of digital financial services on the velocity of money and monetary stability in WAEMU countries?

This study analyzes the impact of financial digitization on money velocity and inflation in the countries of the West African Economic and Monetary Union (WAEMU) over the period 2010-2024. To account for the simultaneous interactions between these interrelated monetary variables, the analysis employs a system of simultaneous equations estimated using Three-Stage Least Squares (3SLS), with Two-Stage Least Squares (2SLS) used as a robustness check. The empirical findings show that the expansion of digital financial services has a statistically significant negative effect on money velocity, suggesting a form of “digital hoarding” associated with increased holdings of electronic liquidity. Digital finance is also associated with lower inflation, indicating that the expansion of digital financial services may contribute to improved monetary and market efficiency. Furthermore, the results confirm a positive relationship between money velocity and inflation, consistent with the predictions of the quantity theory of money. These findings suggest that central banks should strengthen the monitoring of digital financial developments in monetary aggregate management and incorporate digital structural changes into inflation forecasting frameworks to support macroeconomic stability in the WAEMU.