Abstract
• Village-level shocks induce the use of mobile money as a risk-sharing instrument across different regions. • Cross-village risk sharing via mobile money systematically reallocates money supply, facilitating inflation. • Increased use of mobile money in response to village-level shocks elevates national consumer price indices. • The power to distribute is equal to the power to generate money supply in countries with limited market integration. Mobile money has been hailed as a serious innovation in the pursuit of financial inclusion and poverty alleviation; however, its macroeconomic effect is not fully understood. This study presents a regional theory of inflation and argues that limited market integration contributes to mobile money’s inflationary effects. Household survey data from Kenya confirms increased use of mobile money after village- and supra-village-level shocks due to risk-sharing between liquidity-flexible and liquidity-constrained regions. A difference-in-differences empirical assessment indicates that mobile money deployment increases national consumer price indices. Findings support that the power to distribute equals the power to generate money supply in developing countries.
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