Financial Exclusion and the Distributional Limits of Monetary Policy

Quaicoe, Nana (2026): Financial Exclusion and the Distributional Limits of Monetary Policy.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: monetary policy, financial inclusion, mobile money, TANK model, fiscal dominance, Taylor rule, distributional effects, Sub-Saharan Africa
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance

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