Financial inclusion and stability: Review of theoretical and empirical links

Abstract

This paper reviews the literature on financial stability and financial inclusion-two broad objectives of financial policy that may be mutually dependent. The review suggests the possible co-dependence of stability and inclusion. We build on this theoretical motivation by exploring stylized facts (correlations) obtained from data sets that have been widely used in the literature on financial inclusion and stability. The empirical correlations suggest that, on average, financial inclusion and stability correlate negatively, but the correlations vary systematically across individuals, firms, and country contexts. Depending on the financial instrument and stability measure, positive correlations are also likely. These associations reflect some findings in the existing literature, but also point to knowledge gaps that can be addressed by future research.