The Effectiveness of Monetary Policy in Africa: Modeling the Impact of Financial Inclusion

Abstract This study uses annual data over the period ۲۰۰۵-۲۰۱۴ and the Panel VECM approach to examine financial inclusion and monetary policy effectiveness in Africa. The study shows that financial inclusion and monetary policy effectiveness are linked by a set of long-run relationships. Policy reaction to the positive financial inclusion shock is not significant. Policy reaction to the positive money supply shock is statistically significant and positive in the short-run while reactions are not significantly different from zero in the long-run. On the other hand, the positive interest rate has a positive and statistically significant permanent effect on the level of monetary policy effectiveness. To various degrees, financial inclusion, money supply and interest rate shocks have some role in explaining variations in monetary policy effectiveness, but in the long-run, more than ۴۵ percent of variations in policy effectiveness are explained by interest rate shocks. Moreover, there exists a one-way causality from monetary policy effectiveness to financial inclusion. This study establishes that financial inclusion is not a significant driver of monetary policy effectiveness in Africa. On the contrary, monetary policy effectiveness is the driver of financial inclusion. For increased financial inclusion in Africa, therefore, heightened effectiveness of monetary policy will be required.

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Keywords: Financial Inclusion ، monetary policy ، Panel VECM ، Causality. JEL Classification: E۵۲ ، E۴۴ ، G۱۸ ، C۳۲