Monetary Policy and Financial Exclusion in an Estimated DSGE Model of Sub-Saharan African Economies

This paper examines the effectiveness of monetary policy and its implications for financially included and excluded households in Sub-Saharan African (SSA) economies, using an estimated New-Keynesian dynamic stochastic general equilibrium (DSGE) model. The model has financially included households coexisting with financially excluded households. We exploit time series data on four SSA economies, spanning 1985–2016, to estimate the model’s parameters through Bayesian inference methods. Our estimation results show that the share of financially excluded households in these economies is relatively small, usually between 35% and 42%. Further, our Bayesian impulse response analysis shows that a positive monetary policy shock significantly reduced inflation and output, despite a sizeable fraction of the population is financially excluded. Additionally, we find that contractionary monetary policy tends to have differentiated impacts; it decreases the consumption of financially excluded households more than that of financially included ones. The results reveal that financially included households are able to absorb shocks, and thus can smooth consumption more effectively than financially excluded households. Generally, although an increase in the number of financially excluded households reduces the effects of interest rate policies, we find an opposite result: the effectiveness of monetary policy improves as the fraction of financially included households falls.