Fintech can reinforce the effectiveness of monetary policy in lowering inflation across emerging and developing economies when paired with tighter policy settings, according to a research published by Afreximbank, highlighting the growing role of digital finance in macroeconomic management.
The working paper, authored by Ashesi University researcher James Atambilla Abugre, analyzed panel data from 82 emerging and developing countries spanning 2000 to 2021 using a dynamic system generalized method of moments (GMM) model. The study found that tighter monetary policy independently reduces inflation, while greater access to financial services through fintech also exerts a disinflationary effect. At the same time, increased use of fintech services can fuel inflationary pressures by accelerating economic activity and credit creation.
The research suggests the interaction between policy tightening and fintech is more nuanced than previously understood. While broader access to digital financial services combined with restrictive monetary policy was associated with greater price stability, the interaction between tighter monetary policy and fintech usage reduced inflation, indicating that policymakers may be able to strengthen anti-inflation measures by integrating digital financial ecosystems into policy frameworks.
Central banks across emerging markets continue to grapple with adapting traditional monetary tools to increasingly digital financial systems. According to the paper, rapid growth in mobile money, digital lending and electronic payments is reshaping how monetary policy is transmitted through economies, particularly in countries where conventional banking channels are relatively shallow.
The study argues that fintech’s impact depends on whether policymakers focus on expanding access or on increased usage. Wider access to financial services through digital platforms can improve financial inclusion, transaction efficiency and monetary policy transmission, helping restrain inflation. However, heavier use of fintech products, including digital credit and payment platforms, may increase money velocity and consumer demand, contributing to higher inflation if left unchecked.
For policymakers, the paper recommends calibrating monetary policy to reflect the changing structure of financial intermediation rather than treating fintech as a separate development. The author concludes that combining appropriate monetary tightening with fintech innovation could improve price stability while supporting financial inclusion and economic growth, provided regulators balance innovation with safeguards against excessive credit expansion and financial instability.
