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Financial Exclusion and the Distributional Limits of Monetary Policy

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  • Quaicoe, Nana

Abstract

In economies where a portion of the population transacts through mobile money and the other portion strictly uses only cash, can any single interest rate rule serve both groups well? I develop a two-agent New Keynesian model calibrated to Ghana in which included households manage liquidity through mobile money under Baumol– Tobin demand, while excluded households depend on government transfers under fiscal dominance. I find a critical threshold at approximately 70 percent financial exclusion.Below it, aggressive inflation targeting is optimal for both household types. Above it, the welfare surface for included households develops an interior optimum, the optimal Taylor rule diverges across groups, and no single rule resolves the conflict. The distributional cost of monetary policy is convex in exclusion: the welfare variance ratio between household types rises from 7.6:1 at 50 percent exclusion to 98:1 at 80 per- cent, the range observed across Sub-Saharan Africa. Aggregate welfare statistics mask this entirely. The trade-off is reducible only through financial inclusion, not through monetary policy design.

Suggested Citation

  • Quaicoe, Nana, 2026. "Financial Exclusion and the Distributional Limits of Monetary Policy," MPRA Paper 128793, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:128793
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    References listed on IDEAS

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    1. Anand, Rahul & Prasad, Eswar, 2010. "Optimal Price Indices for Targeting Inflation under Incomplete Markets," IZA Discussion Papers 5137, IZA Network @ LISER.
    2. Romain Houssa & Christopher Otrok & Radu Puslenghea, 2010. "A Model for Monetary Policy Analysis for Sub-Saharan Africa," Open Economies Review, Springer, vol. 21(1), pages 127-145, February.
    3. Aaron Mehrotra & James Yetman, 2014. "Financial inclusion and optimal monetary policy," BIS Working Papers 476, Bank for International Settlements.
    4. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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