Share:


The effect of financial inclusion and financial technology on effectiveness of the Indonesian monetary policy

    Birgitta Dian Saraswati   Affiliation
    ; Ghozali Maski   Affiliation
    ; David Kaluge   Affiliation
    ; Rachmad Kresna Sakti   Affiliation

Abstract

The existence of non-inclusive households significantly reduces the effect of the interest rate change policy on households inter-temporal consumption decisions. Further, financial inclusion is closely related to fintech. On the one hand, fintech helps overcome the financial inclusion problem because fintech manages to reach those who were previously inaccessible by banks. On the other hand, fintech will change the payment system structure in an economy that will eventually affect the effectiveness of monetary policy. Using the Vector Error Correction Model (VECM) with the observation period of 2009–2018, this study aims to analyze the effects of financial inclusion and fintech on  effectiveness of the Indonesian monetary policy within the framework of the transmission mechanism of monetary policy through interest rate channel with both the cost of capital effect and the substitution effect. The results demonstrate that  financial inclusion level affects inflation rate as a proxy of effectiveness of the Indonesian monetary policy, both in the short run and long run. However, the effect of shocks in financial inclusion on inflation is not permanent. Meanwhile, fintech only affects inflation rate in the short run. However, shocks in fintech affect the volatility of inflation rate is permanent both through the substitution effect and the cost of capital effect.

Keyword : financial inclusion, financial technology (Fintech), inflation, transmission mechanism of monetary policy, interest rate channel, Vector Error Correction Model (VECM)

How to Cite
Saraswati, B. D., Maski, G., Kaluge, D., & Sakti, R. K. (2020). The effect of financial inclusion and financial technology on effectiveness of the Indonesian monetary policy. Business: Theory and Practice, 21(1), 230-243. https://doi.org/10.3846/btp.2020.10396
Published in Issue
Mar 19, 2020
Abstract Views
2606
PDF Downloads
1709
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

References

Al-Laham, M., Al-Tarawneh, H., & Abdallat, N. (2009). Development of electronic money and its impact on the Central Bank role and monetary policy. Issues in Informing Science & Information Technology, 6, 339–349. https://doi.org/10.28945/3328

Amatus, H., & Alireza, N. (2015). Financial inclusion and financial stability in Sub-Saharan Africa(Ssa). The International Journal of Science, 36(1). https://doi.org/10.1097/ACM.0b013e3182264a25

Ascari, G., Colciago, A., & Rossi, L. (2011). Limited asset market participation: does it really matter for monetary policy? SSRN. https://doi.org/10.2139/ssrn.1948412

Alexander, K. (2017, July). The role of Finthech and digital finan-cial services. UNCTAD multi-year expert meeting on trade, services and development financial inclusion, 18–20.

Bank Indonesia. (2014). Booklet Keuangan Inklusif. https://www.bi.go.id/id/perbankan/keuanganinklusif/edukasi/Pages/Booklet-Keuangan-Inklusif.aspx

Bank Indonesia. (2018). Statistik Ekonomi dan Keuangan Indonesia. www.bi.go.id

Dabla-Norris, E., Ji, Y., Townsend, R., & Unsal, D. F. (2015). Distinguishing constraints on financial inclusion and their impact on GDP, TFP, and Inequality, 1–63. NBER working paper series. https://doi.org/10.3386/w20821

Dienillah, Azka, A., & Anggraeni, L. (2016). Dampak inklusi keuangan terhadap stabilitas sistem keuangan di Asia. Buletin Ekonomi Moneter Dan Perbankan, 18(4), 409–430. http://digilib.unila.ac.id/54922/3/SKRIPSI%20TANPA%20BAB%20PEMBAHASAN.pdf

Dupas, S., Keats, A., & Robinson, P. G. (2013). Challenges in banking the rural poor. Challenges in Banking the Rural Poor, 117(December).

Evans, O. (2016). The effectiveness of monetary policy in Africa: modeling the impact of financial inclusion. According to CGAP 20(3), 327–337. https://ier.ut.ac.ir/article_58961_7b8e37e5e5fb73a949f9048b0a04650c.pdf

Fiedler, S., Gern, K. J., Kooths, S., & Stolzenbur, U. (2017). Financial innovation and monetary policy: challenges and prospects. IP/A/ECON/. http://www.europarl.europa.eu/RegData/etudes/IDAN/2017/602045/IPOL_IDA(2017)602045_EN.pdf

Galí, D., Salido, D. L., & Valles, J. (2004). Rule of thumb consumers and the design of interest rate rule, 14–15. http://www.crei.cat/wp-content/uploads/users/pages/glv04jmcb.pdf

Greene, W. H. (2002). Econometric analysis (5th ed.). New York. Prentice Hall.

Hannig, A., & Jansen, S. (2010). Financial inclusion and financial stability: current policy issues. SSRN. https://doi.org/10.2139/ssrn.1729122

Hawkins, J. (2001). Electronic finance and monetary policy. BIS Papers, (7), 98–105. https://www.bis.org/publ/bppdf/bispap07k.pdf

International Monetary Fund IMF. (2018). International financial stastistic. www.imf.org

Julie, O. (2013). The relationship between financial inclusion and GDP growth in Kenya. Research Project Submitted in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Business Administration of the University of Nairobi. http://erepository.uonbi.ac.ke/bitstream/han-dle/11295/58543/Oruo_Financial%20Inclusion%20and%20GDPGrowth.pdf?sequence=3

Khan, H. R. (2011). Financial inclusion and financial stability: are they two sides of the same coin? RBI Monthly Bulletin (March), 553–563. https://doi.org/10.1148/radiol.14132404

Kontan. (2018). Fintech Payment masih Mendominasi di 2018. Kontan online 21 Desember 2017. https://keuangan.kontan.co.id/news/fintech-payment-masih-mendominasi-di-2018

Lenka, S. K., & Bairwa, A. (2016). Does financial inclusion affect monetary policy in SAARC countries? Cogent Economics and Finance, 4(1), 1–8. https://doi.org/10.1080/23322039.2015.1127011

Lapukeni, A. F. (2015). The impact of financial inclusion on monetary policy effectiveness: the case of Malawi. International Journal of Monetary Economics and Finance, 8(4), 360. https://doi.org/10.1504/ijmef.2015.073229

Mbutor, O. (2013). The impact of financial inclusion on monetary policy in Nigeria. Journal of Economics and International Finance, 5(8), 318–326. http://www.academicjournals.org/apa>p/webroot/article/article1383044040_Mbutor%20and%20Uba.pdf

Mehrotra, A., & Yetman, J. (2014). Financial inclusion and optimal monetary policy. BIS Working Papers, 476(476), 1–30. https://pdfs.semanticscholar.org/0917/e6af7aeab1bca424b-c44b71028d319f384f5.pdf

Mishra, P. K., & Pradhan, B. B. (2008). Financial innovation and effectiveness of monetary policy. SSRN. https://doi.org/10.2139/ssrn.1262657

Mylonas, P., Schich, S., & Wehinger, G. (2000). A changing financial environment and the implications for monetary policy, (January). https://pdfs.semanticscholar.org/812d/71e2b8503d45c4d60261df2d0cd9d74fc63b.pdf

Nakaso, H. (2016). FinTech – its impacts on finance, economies and central banking. FinTech and the Future of Money, (November), 1–7.

Oji, C. K. (2015). Promoting financial inclusion for inclusive growth in Africa. South African Institute of International Affairs. Occasional Paper 210.

Onaolapo, A. R. (2015). Effect of financial inclusion on the economic growth of Nigeria (1982–2012). International Journal of Business and Management Review, 3(8), 11–28.

Pfaff, B. (2008). VAR, SVAR and SVEC models: implementation within R package vars. JSS Journal of Statistical Software, 27(4). http://www.jstatsoft.org/

Sahay, R., Cihak, M., N’Diaye, P., Barajas, A., Mitra, S., Kyobe, A., & Yousefi, R. (2015). Financial Inclusion: can it meet multiple macroeconomic goals? Staff Discussion Notes, 15(17), 1. https://doi.org/10.5089/9781513585154.006

Sarma, M. (2012). Index of financial inclusion – a measure of financial sector inclusiveness. Working Paper No. 07. https://finance-and-trade.htw-berlin.de/fileadmin/HTW/Forschung/Money_Finance_Trade_Development/working_paper_series/wp_07_2012_Sarma_Index-of-Financial-Inclusion.pdf

Sicilia, J. (2017). Fintech Trends in Emerging ASEAN, (June). https://www.bbvaresearch.com/wp-content/uploads/2017/07/June-2017-ASEAN-Fintech-Trends1.pdf

Salomon, F., & Klaus-Jürgen, G. S. (2017). Financial innovation and monetary policy: challenges and prospects. Policy department a: economic and scientific policy. http://www.europarl.europa.eu/RegData/etudes/IDAN/2017/ 602045/IPOL_IDA(2017)602045_EN.pdf

Svetlana, S., & Irina, K. M. (2017). Fintech as financial innovation – the possibilities and problems of implementation. European Research Studies Journal, XX(3), 1. https://www.ersj.eu/dmdocuments/2017-xx-3-a-66.pdf

Worldbank. (2014). Global Findex Database. http://databank.worldbank.org/Data/Views/reports/tableview.aspx

Zulfiqar, K., Chaudhary, M. A., & Aslam, A. 2016. Financial inclusion and its implications for inclusive growth in Pakistan. Pakistan Economic and Social Review, 54(2), 297–325. https://doi.org/10.3402/ejpt.v7.29303