The Relationship between Financial Inclusion and Monetary Policy: A Comparative Study of Countries’ in Sub-Saharan Africa and Latin America and the Caribbean

Abstract

ABSTRACT Monetary policy ensures the financial system stabilization. Financial inclusion, characterized by the access and use of available financial services (credit, savings, payments, insurance at a low cost), by a broader population, may explain the effectiveness of the monetary policy, especially in developing countries. The objective of this study is to carry out a comparative analysis between the countries of Sub-Saharan Africa (SSA) and the countries of Latin America and the Caribbean (LAC), on the causal relationship between financial inclusion and monetary policy, as well as to assess the impact of financial inclusion over monetary policy. To support our study, we applied the panel vector autoregressive (PVAR) methodology, simple panel data models, and a feasible generalized least squares (FGLS) model. Results provide strong evidence of the existence of reverse causality between financial inclusion and monetary policy in both SSA and LAC, with monetary policy facilitating financial inclusion in both regions. Financial inclusion increases the effectiveness of monetary policy in SSA, while for LAC financial inclusion improves the efficiency of monetary policy. Thus, increased access to and use of financial services increase the efficiency of monetary policy in controlling inflation. Governments are encouraged to design or enhance policies that expand financial services, as well as to promote investment in financial inclusion in developing countries, to maintain the monetary system stability.