Financial Inclusion and the Effectiveness of Monetary Policy: Empirical Evidence From Brazil

This study examines the relationship between financial inclusion and the effectiveness of monetary policy in Brazil from 2004 to 2023. As a major emerging economy, Brazil has made notable strides in expanding access to financial services, particularly through digital banking and social welfare programs. However, significant regional and socioeconomic disparities persist. To capture the multidimensional nature of financial inclusion, a composite index is constructed using indicators such as bank branch density, ATM access, credit usage, and digital payments. Empirical analysis shows that greater financial inclusion enhances the effectiveness of monetary policy by strengthening the transmission mechanism. Specifically, higher financial inclusion is associated with lower inflation, indicating improved policy outcomes. The study also finds a negative relationship between lending interest rates and inflation, suggesting that monetary tightening can reduce inflationary pressures. Additionally, a positive correlation between exchange rates and inflation is observed, implying that currency depreciation may fuel inflation in Brazil’s open economy. These findings highlight the role of inclusive financial systems in supporting macroeconomic stability. Enhancing access to financial services not only promotes social equity but also improves the central bank’s ability to manage inflation effectively.