On the Distributive Consequences of Monetary Regulation

• In Event: The Politics of Central Banking: No more Free Lunches

Abstract

At the forefront of international and state initiatives to promote financial inclusion is the adoption of digital payments infrastructure to facilitate the use of ``mobile money'' by unbanked populations. While the potential for such technology to better facilitate exchange in markets lacking formal financial institutions is widely acknowledged, I argue the success of these programs is contingent on the appropriate regulation by states and their central banks. In this paper, I demonstrate with a search theoretic model of exchange the distributive consequences of central bank regulations of mobile money. Specifically, I find absent extensive interoperability regulations which have been met with variable success to date, mobile money adoption in unbanked regions can exacerbate economic disparities and worsen the economic conditions of precisely the populations it seeks to benefit. To examine this relationship empirically, I turn to district-level economic and survey data on mobile money usage throughout India in 2017. The results are consistent with theoretical implications: while the adoption of mobile money in regions with formal financial institutions reduces transaction costs and stabilizes prices, this effect disappears and potentially reverses in regions without access to traditional banking institutions. Taken together, these results demonstrate the distributive consequences of central bank regulation and caution against the expectation that the private provision of digital payments infrastructure is sufficient to promote the objectives of financial inclusion.

Author

• Caitlin T. Ainsley, University of Washington