Central bank interest rates become mathematically incapable of working for everyone once more than 70% of the population lacks a bank account.
April 25, 2026
Original Paper
Financial Exclusion and the Distributional Limits of Monetary Policy
SSRN · 6615519
The Takeaway
Developing nations face a fundamental conflict in monetary policy that cannot be solved by a single interest rate. When a large majority of the people are unbanked, a rate hike that helps the wealthy can actively harm the poor. This distributional limit means that the primary tool of modern economics is broken in many parts of the world. Policy makers are essentially trying to steer a ship with a rudder that only controls the top deck. Effective economic management in these regions requires more than just adjusting rates. True stability is impossible without first bringing the majority of the population into the formal financial system.
From the abstract
In economies where a portion of the population transacts through mobile money and the other portion strictly uses only cash, can any single interest rate rule serve both groups well? I develop a two-agent New Keynesian model calibrated to Ghana in which included households manage liquidity through mobile money under Baumol-Tobin demand, while excluded households depend on government transfers under fiscal dominance. I find a critical threshold at approximately 70 percent financial exclusion. Bel