ABSTRACT
Financial inclusion plays a critical role in facilitating financial transactions through formal financial channels and, hence, easing funds across economic agents, which is associated with dynamics in savings, consumption, and other macroeconomic aggregates in the economy. This chapter investigates the impacts of financial inclusion on macroeconomic stability empirically. We test the hypothesis of whether financial innovations may help construct an inclusive financial system that eventually leads to macroeconomic stability at both the macroeconomic and the micro-bank levels in low-to-middle-income fragile states. The estimates produced by the Generalized Method of Moments (GMM) and Dynamic Panel Threshold Model (DPT) reveal a heterogeneous effect of financial inclusion on macroeconomic stability in Kazakhstan. The first type of innovation is disruptive financial technologies that make financial services affordable and accessible and positively affect macroeconomic stability. Furthermore, inclusion tends to lead vulnerable portions of the population to mainstream financial institutions, which results in instability. Second, efficiency innovation makes financial services affordable; however, it pressures stability by shrinking the labor market. Third, sustaining innovation seems to be insignificant. This implies that policies that enhance the financial inclusion status are imperative and might contribute to escaping the middle-income trap. For that reason, this empirical research work helps to shed light on the dynamics of the financial system’s stability and its association with financial inclusion.
