Does financial inclusion improve the effectiveness of monetary policy in South Asian countries? Exploring the role of interest rate

Susanta Kumar Sethy, Narayan Sethi and D. P. Priyadarshi Joshi

Journal of Financial Economic Policy, 2025, vol. 18, issue 1, 136-154

Abstract: PurposeSeveral studies reported that financial inclusion was instrumental in effective monetary policy transmission. Thus, this paper aims to examine the implications of financial inclusion on inflation, a proxy for monetary policy efficacy, in the South Asia Association of Regional Cooperation nations.Design/methodology/approachThis paper used the data for seven South Asian nations from 2004 to 2023. Multidimensional financial inclusion indices for each country are estimated every year using the UNDP methodology. The second-generation unit root tests are applied to the stationarity of the data. First, the study applied the fixed effect, random effect and pooled regressions to the data. Second, to solve the problem of heteroskedasticity and cross-sectional dependency, this study used the feasible-generalized least square method, and to check the robustness of the results, the study reported the panel-corrected standard error regressions estimates.FindingsThe feasible generalized least square regression result suggests that financial inclusion is instrumental in controlling inflation in these economies. Both demand and supply-side financial inclusion factors contribute to the success of the bank credit channel in this region. Furthermore, interest rates control inflation. The impact of per capita gross domestic product growth on inflation is negative and statistically significant. However, the coefficient for money supply growth is found to be statistically insignificant.Originality/valueThis study adds to the existing literature in three points. First, the multidimensional financial inclusion index for seven countries is estimated; second, the second-generation tests are applied to examine the impact of financial inclusion on inflation for the panel of seven South Asian nations; and third, the paper also discusses the mediating effect of interest rate on controlling inflation.

Keywords: Financial inclusion; Monetary policy; FGLS; SAARC (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-07-2024-0195

DOI: 10.1108/JFEP-07-2024-0195

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