Financial development, financial inclusion and the effectiveness of monetary policy transmission mechanism in Africa

Abstract

This study examined the nexus between financial development, financial inclusion, and monetary transmission mechanisms in Africa. The study employed annual data on 54 African countries from 2004 to 2023, using econometric techniques including Driscoll and Kraay fixed effects models, quantile regression models, panel structural vector autoregressive models, and the JKS causality tests. The findings revealed that financial development reduces inefficiencies in the interest rate and inflation expectations channels, enhancing transmission effectiveness. It also strengthens the wealth and collateral effects in the asset price channel and plays a role in expanding credit availability. However, financial inclusion improves monetary transmission efficiency across the interest rates, credit and inflation expectations channels. Furthermore, the findings showed that the interest rate channel had the most significant impact on output. Therefore, the study suggests that policymakers should leverage financial development and financial inclusion to strengthen growth-oriented channels and prioritise interest rate management to drive growth.