Financial Inclusion and Monetary Policy: A Study on the Relationship between Financial Inclusion and Effectiveness of Monetary Policy in Developing Countries

TL;DR

This study investigates how different measures of financial inclusion influence monetary policy effectiveness in developing countries, revealing mixed effects and emphasizing the importance of financial inclusion for inflation stabilization.

Contribution

It provides empirical evidence on the differential impacts of financial inclusion measures on monetary policy in developing countries, highlighting policy implications.

Findings

ATM density negatively affects monetary policy effectiveness

Bank account numbers have a positive but not significant impact

Lending rate significantly influences inflation

Abstract

The study analyzed the impact of financial inclusion on the effectiveness of monetary policy in developing countries. By using a panel data set of 10 developing countries during 2004-2020, the study revealed that the financial inclusion measured by the number of ATM per 100,000 adults had a significant negative effect on monetary policy, whereas the other measure of financial inclusion i.e. the number of bank accounts per 100,000 adults had a positive impact on monetary policy, which is not statistically significant. The study also revealed that foreign direct investment (FDI), lending rate and exchange rate had a positive impact on inflation, but only the effect of lending rate is statistically significant. Therefore, the governments of these countries should make necessary drives to increase the level of financial inclusion as it stabilizes the price level by reducing the inflation in the economy.