FINANCIAL INCLUSION AND MONETARY POLICY: A REVIEW OF RECENT STUDIES

Abstract

This study attempts to review the extant literature on financial inclusion, financial development innovation and monetary policy. It surveys literature between 2007 and 2015 and identifies key themes in this field of study, methodologies adopted, geographical distribution of the studies and synthesizes these to identify relevant gaps and direction for future research. The study makes very interesting finding. Common areas of study can be categorized as determinants, effects and evaluation of these concepts. Areas for discussions have focused on financial inclusion and its implications for monetary policy and financial stability. The linkage between financial inclusion and monetary policy has been studied in few instances and through models that estimate a direct relationship. Studies that estimate models which examine the mediating role of financial development and innovation on the impact of financial inclusion on monetary policy are yet to be done. Researchers have mostly modeled that, growth in financial innovation, financial development and financial inclusion on their own, do individually enhance growth in total factor productivity. These studies however do not explore the possible mediating effects of these factors on another in maximising their effects. Innovation can stir up financial inclusion through the availability of various products that either transfer or mitigate the risk of providing financial services to the unbanked. However, while innovation directly spurs financial inclusion effectively, how this relationship is affected at different levels of financial development is yet to be established. Literature has documented various ways in which increased financial inclusion could be beneficial for financial stability, but it is yet to be explored how sensitive this effect could be at different levels of financial depth. These are the gaps the study identifies and recommends to be filled by furture research. The study futher recommends that empirical examination of the effect of financial development on the relationship between financial innovation and financial inclusion be done in addition to cross-country and regional studies on the impact of financial inclusion on monetary policy using panel data.