The relationship between Financial Inclusion and Monetary Stability in Mozambique: Analysis based on an Error Correction Model (VECM)

Carla Fernandes, Maria Rosa Borges, Esselina Macome and Jorge Caiado

No 2021/01, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: The present work aims to assess the existence of the relationship between financial inclusion and monetary stability in Mozambique based on the analysis of the vector correction error model (VECM) for the period from 2005 to 2020. The indicators used in the study follow the approach taken by Mbutor and Uba (2013), Lapukent (2015), Lenka and Bairwa (2016) and Hung (2016). In addition to indicators of traditional banking institutions, this article goes further by also incorporating indicators relating to services of electronic money institutions with the objective of capturing the impact of digital financial services on financial inclusion and their role in financial stability. The study presents results consistent with economic theory. The long-term VEC model proved to be statistically significant and confirmed the existence of a long-term relationship between financial inclusion and monetary stability. It also revealed that the deviation of the CPI from its long-term equilibrium is adjusted at a speed of 10.19%. The coefficients of the short-term VEC model were negative for the variables of branches and bank accounts. The coefficients of agents and EMI accounts were not positive, and their shocks are removed after 6 quarters, after which the expected negative sign is observed achieving monetary stability.

Keywords: Financial Inclusion; Monetary Stability; VEC Model; Digital Financial Services JEL Classification: G20, G21, G28. (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-fle and nep-mon
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