Abstract
The existence of non-inclusive households significantly reduces the effect of the interest rate change policy on households inter-temporal consumption decisions. Further, financial inclusion is closely related to fintech. On the one hand, fintech helps overcome the financial inclusion problem because fintech manages to reach those who were previously inaccessible by banks. On the other hand, fintech will change the payment system structure in an economy that will eventually affect the effectiveness of monetary policy. Using the Vector Error Correction Model (VECM) with the observation period of 2009–2018, this study aims to analyze the effects of financial inclusion and fintech on effectiveness of the Indonesian monetary policy within the framework of the transmission mechanism of monetary policy through interest rate channel with both the cost of capital effect and the substitution effect. The results demonstrate that financial inclusion level affects inflation rate as a proxy of effectiveness of the Indonesian monetary policy, both in the short run and long run. However, the effect of shocks in financial inclusion on inflation is not permanent. Meanwhile, fintech only affects inflation rate in the short run. However, shocks in fintech affect the volatility of inflation rate is permanent both through the substitution effect and the cost of capital effect.
Highlights
Financial inclusion has been recently an important topic in several international economic discussion forums because many consider it to be an effective solution to eradicate poverty problem that is common in many countries worldwide
The results indicate that a shock in the form of increased financial inclusion rate will be responded by decreased inflation rate until four quarters ahead
Within the framework of the transmission mechanism of monetary policy through interest rate channel with both the cost of capital effect and the substitution effect, the financial inclusion rate plays a crucial role in achieving inflation target as an indicator of the effectiveness of monetary policy in Indonesia
Summary
Financial inclusion has been recently an important topic in several international economic discussion forums because many consider it to be an effective solution to eradicate poverty problem that is common in many countries worldwide. Countries propose various policies to enhance financial inclusion among their population. In Indonesia, the government through Financial Service Authority (Otoritas Jasa Keuangan – OJK) in 2015 launched the officeless financial service program (Laku Pandai – Layanan Keuangan Tanpa Kantor) to encourage financial inclusion. This program focuses on remote areas that make it difficult for formal financial institutions to access. Financial inclusion aims to increase public welfare through sustainable economic growth. In 2014 only 69 percent (36.1 percent) of the total adult population in East Asia and Pacific (Indonesia) who have accounts at formal financial institutions. It is likely that this condition affects the transaction behavior of population and eventually their responses to governments’ various economic policies, especially monetary ones (Worldbank, 2014)
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