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The Mutual Relationship between Financial Inclusion and Effectiveness of Monetary Policy: Evidence from Upper-Middle-Income Countries

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  • Hakan Yıldırım
  • Tuba Özkan
  • Anıl Lögün
  • Mesut Doğan

Abstract

Enhancing financial inclusion is crucial for achieving global objectives such as sustainable growth, improved societal welfare, and poverty reduction. Due to its importance, financial inclusion has recently become a key policy issue and a widely studied topic. This study investigates the relationship between financial inclusion and monetary policy in upper-middle-income countries using the Two-Step System GMM and Panel Granger Causality methods. The findings reveal a bidirectional negative relationship between inflation and financial inclusion. Inflation negatively affects financial inclusion, while an increase in financial inclusion has a reducing effect on inflation. Additionally, digitalization, regulatory quality, and money supply positively affect financial inclusion, while the growth of money supply and deposit interest rates increase inflation. According to Granger causality analysis, there is a causality running from financial inclusion to the inflation rate. Accordingly, policymakers in upper-middle-income countries are advised to adopt balanced monetary policies and consider that increasing financial inclusion can help mitigate the adverse effects of inflation.

Suggested Citation

  • Hakan Yıldırım & Tuba Özkan & Anıl Lögün & Mesut Doğan, 2025. "The Mutual Relationship between Financial Inclusion and Effectiveness of Monetary Policy: Evidence from Upper-Middle-Income Countries," Journal of Research in Economics, Politics & Finance, Ersan ERSOY, vol. 10(2), pages 619-635.
    • Handle: RePEc:ahs:journl:v:10:y:2025:i:2:p:619-635
    DOI: 10.30784/epfad.1642086
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    References listed on IDEAS

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    1. Kathleen Beegle & Rajeev Dehejia & Roberta Gatti, 2003. "Child Labor, Crop Shocks, and Credit Constraints," NBER Working Papers 10088, National Bureau of Economic Research, Inc.
    2. Asli Demirguc-Kunt & Leora Klapper, 2013. "Measuring Financial Inclusion: Explaining Variation in Use of Financial Services across and within Countries," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 279-340.
    3. Asli Demirguc-Kunt & Leora Klapper, 2013. "Measuring Financial Inclusion: Explaining Variation in Use of Financial Services across and within Countries," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(1 (Spring), pages 279-340.
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    Keywords

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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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