Do macroprudential regulations condition the role of financial inclusion for ensuring financial stability? Cross-country perspective
Abstract
Purpose
Empirical studies, to date, show that financial inclusion (FI) enhances financial stability (FS) by promoting a large deposit base, reducing information asymmetry, and strengthening market power on the one hand, and leads to financial fragility by expanding credit without proper screening, increasing operational costs, and provoking borrowers' moral hazard on the other. Thus, the most important issue is to maintain FS while extending formal financial services to the impoverished and disadvantaged segments of society. Therefore, this paper investigates the efficacy of macroprudential regulations (MPRs) to align these policy divergences.
Design/methodology/approach
To accomplish the objective and facilitate policy implications, the authors use aggregated and disaggregated measures of both FI and MPRs, employ advanced econometric models that minimize endogeneity and ensure robustness, and investigate their joint effectiveness in upholding FS using data of 138 countries spanning the 2004–2017 years.
Findings
The findings indicate that the effectiveness of MPRs is instrument specific. Some MPRs that obstruct access to formal financial services, in particular, moderate the advantage of FI in achieving FS, while others boost the effect of inclusion in attaining financial sector stability. Therefore, prudence should be emphasized while designing MPRs as a tool for aligning the policy trade-off between FI and FS.
Originality/value
To the best of the authors knowledge, this paper extends previous empirical research by investigating the conditioning impact of MPRs in the FI-FS nexus.
Keywords
Acknowledgements
The author would like to express their sincere gratitude to the editors and anonymous reviewers for their insightful comments and suggestions, which were useful in improving the quality of the paper. The authors would also like to acknowledge Prof. Dr. Dongmin Kong for his suggestions while conducting the current study. Any remaining errors are the authors'.
Citation
Saha, M. and Dutta, K.D. (2022), "Do macroprudential regulations condition the role of financial inclusion for ensuring financial stability? Cross-country perspective", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-08-2021-1232
Publisher
:Emerald Publishing Limited
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