Financial Inclusion and Economic Growth in WAEMU: A Multiscale Heterogeneity Panel Causality Approach

Abstract

This paper examines the causal relationship between Financial Inclusion and economic growth in the West African Economic and Monetary Union (WAEMU) from 2006 to 2015. We combined the heterogeneity panel causality test proposed by [1] with the Maximal Overlap Discrete Wavelet Transform (MODWT) to analyze the bi-directional causality at different time scales. We used two Financial Inclusion indicators: the overall rate of demographic penetration of financial services (Financial Inclusion supply) and the overall rate of use of financial services (Financial Inclusion demand). Our results show that at scale 1 (2 - 4 years), there is no causality between economic growth and Financial Inclusion indicators. However, at scale 2 (4 - 8 years), we found a bi-directional causality between economic growth and Financial Inclusion. Policymakers should therefore promote reforms that are beneficial to financial inclusion, especially on the supply side, while making the levers for macroeconomic growth more efficient, which also seems to be a decisive factor in financial inclusion.