Impact of financial inclusion on the effectiveness of the interest rate channel of monetary policy transmission in West Africa

Abstract

Monetary policy has been identified as an indispensable tool for macroeconomic stabilization. The transmission of monetary policy is conditioned on the effectiveness of the monetary policy intermediate targets of which interest rate, exchange rate depreciation and money growth are important. Many factors have been shown to affect monetary policy, of which, the role of financial inclusion is important. However, empirical studies on the relationship between financial inclusion and the interest rate of monetary policy transmission are few; as a result, this study examined the impact of financial inclusion on the effectiveness of the interest rate channel of monetary policy transmission in West Africa. In doing this, the study employed a panel dataset consisting of 15 West African countries for periods between 2005 and 2020. The data were from a secondary source, in particular, the World Bank’s World Development Indicator database. The analysis involves descriptive statistics and inferential analysis of the Generalized Method of Moments approach. The result of the generalized methods of the moment showed that financial inclusion improves the effectiveness of the interest rate channel of monetary policy transmission. Based on findings, this study recommends that policy authorities in West Africa should embark on a renewed commitment to ensuring access for all in West Africa.