| Abstract: |
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 ( eoptimizing f) households coexisting with financially
excluded ( ehand-to-mouth f) households. We exploit time series data on four
SSA economies, spanning 1985-2016, to estimate the model fs 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. |