Journal of Economics and Development, Vol. 21 No. 2, pp. 114-130 | https://doi.org/10.1108/JED-07-2019-0018
The interest rate sensitivity of output and prices with different levels of financial inclusion: Evidence from developing economies
he purpose of this paper is to evaluate the interest rate (IR) sensitivity of output and prices in
developing economies with different levels of financial inclusion (FI) for the period 2007Q1–2017Q4.
By using the PCA method to construct an FI index for each country,
the author divides the sample into two groups (high and low FI levels). Then, with panel vector
autoregressions on per group estimated to assess the strength of the impulse response of output and prices
to IR shock.
The findings show that the impact of an IR shock on output and inflation is greater in economies
with a higher degree of FI.
The finding indicates the link between FI and the effectiveness of IRs as a
monetary policy tool, thereby helping Central banks to have a clearer goal of FI to implement their
This study emphasizes the important role of FI in the economy. From there, an FI
solution is integrated into the construction and calculation of its impact on monetary policy, improving the
efficiency of monetary policy transmission, contributing to price stability and sustainable growth.
Keywords:Financial inclusion, Interest rate sensitivity, Monetary policy transmission mechanism