Measuring an equilibrium long-run relationship between financial inclusion and monetary stability in Mozambique

The present work aims to assess the existence of the relationship between financial inclusion and monetary stability in Mozambique based on the analysis of the VEC model for the period from 2005 to 2020. In addition to indicators of traditional banking institutions, this article goes further by also incorporating indicators relating to services of electronic money institutions with the objective of capturing the impact of digital financial services on financial inclusion and their role in financial stability. The long-term VEC model proved to be statistically significant and confirmed the existence of a long-term relationship between financial inclusion and monetary stability. The results also showed that the traditional financial inclusion and non-traditional digital financial inclusion drives the price stability, and in turn, monetary stability. The study concludes that the effectiveness of monetary policy in Mozambique depends on the predictive capacity of the monetary policy instruments, which are highly correlated, to financial inclusion. In this sense, the monetary authority must consider the need to incorporate financial inclusion variables, especially the non-traditional digital ones, in the transmission and forecasting model of the monetary policy rule, to capture the dynamics of financial inclusion segment and its contribution to price stability.