Financial Inclusion and Effectiveness of Monetary Policy in Developing Asia
Author: Shujat Ali

Financial inclusion is a key policy objective in Pakistan as well as in developing Asia, as monetary policy effectiveness depends on strong monetary policy transmission mechanisms, and low levels of financial inclusion weaken the monetary policy transmission mechanisms. Using panel Vector Error Correction Model (VECM), we examine the impact of financial inclusion on monetary policy effectiveness for the panel of countries and also provide evidence on causality between financial inclusion and monetary policy effectiveness. The principal component analysis (PCA) is used to construct the financial inclusion index from multidimensional variables of financial inclusion instead of using of using different indicators individually. Annual data of twenty-four countries from developing Asia over the period 2004-2018, on variables of financial inclusion, inflation, money supply, interest rate and exchange rate, is used to undertake the assessment. We find that financial inclusion, in the long run, explains 83 percent of variation in inflation and 74 percent variation in interest rate. Further, we find unidirectional causality running from financial inclusion to percentage change in CPI. The impulse response of financial inclusion on inflation variable is significant and negative. The results reveal that financial inclusion enhances monetary policy effectiveness in developing Asia. The monetary authorities must focus to promote financial inclusion, as high financially inclusive economies have relatively smaller variations in the policy rate to stabilize prices. Supervisor:- Dr. Sajid Amin Javed Co- Supervisor:- Dr. Ahsan Ul Haq Satti

Meta Data

Keywords : Effectiveness of Monetary Policy, Financial Inclusion
Supervisor: Sajid Amin Javed
Cosupervisor: Ahsan Ul Haq Satti

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