Does digital financial inclusion moderate or exacerbate output volatility?

ABSTRACT

Fintech, broadly encompassing financial innovations enabled by digital technology, has seen phenomenal growth across emerging and developing economies (EMDEs) over the last few years. While the fintech revolution can facilitate broader financial inclusion and spur overall economic growth, concerns have been raised about the possible impact of fintech on growth volatility. Using a selected heterogeneous panel of 40 EMDEs spanning 2009 to 2017 we find that greater digital financial inclusion persistently exacerbates output volatility, although this result holds true only in countries with low banking concentration. Our results are robust to both different definitions of digital financial inclusion and alternative methodologies controlling for potential endogeneity.

KEYWORDS:

• Digital financial inclusion
• output volatility
• bank concentration
• panel data

JEL CLASSIFICATION:

• E44
• E52
• E32
• O11

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ For instance, see Sahay et al. (2020); Haddad et al. (2013); Dabla-Norris and Srivisal (2013); Kose, Prasad, and Terrones (2006); and Bekaert, Harvey, and Lundblad (2006).

² These results are also robust to other closely related measures of digital financial inclusion such as value of mobile money transactions and active mobile money accounts normalized by population.

³ As indicative evidence we added a quadratic term of banking concentration and found it to carry a negative and significant coefficient. Results not shown but available on request.

Additional information

Funding

This work was supported by the Lee Kuan Yew School of Public Policy [Special Project Funding Scheme].