Monetary Policy and Financial Exclusion in an Estimated DSGE Model of Sub-Saharan African Economies

This paper examines the effectiveness of monetary policy and its implications for financially included and excluded households in Sub-Saharan African (SSA) economies, using an estimated New-Keynesian DSGE model. The model has financially included (‘optimizing’) households coexisting with financially excluded (‘hand-to-mouth’) households. We exploit time series data on four SSA economies, spanning 1985-2016, to estimate the model’s parameters through Bayesian inference methods. Our estimation results show that the share of financially excluded households in these economies is relatively small, usually between 35% and 42%. This finding suggests that previous efforts to enhance financial inclusion in SSA have contributed to a general lowering of the cost of financial market participation. Our results also indicate that the monetary authorities in SSA countries have targeted inflation more aggressively than output growth. Further, the results of our Bayesian impulse response analysis suggests that a positive monetary policy shock does perform its intended role of significantly reducing inflation and output, despite a sizeable fraction of the population is financially excluded. Additionally, we find that a contractionary monetary policy tends to have differentiated impacts; it decreases consumption of financially excluded households more than that of financially included ones. The results reveal that financially included households are able to absorb shocks, and thus can smooth consumption more effectively than financially excluded households. Consequently, given that financially included households are better positioned to address shocks, it is recommended that monetary authorities in developing countries place greater emphasis on output growth relative to inflation. That shifting emphasis could support the stabilization of income, which would enable financially excluded households to smooth consumption. In addition, efforts to ensure full financial inclusion are recommended so that monetary policy can more fully achieve its objectives.