Jake Kendall

Central Bankers Shouldn’t Fret Over Mobile Money: Research says it doesn’t cause inflation, and could be beneficial in monetary policy

Editor’s note: Researchers Janine Aron, John Muellbauer and Christopher S. Adam also contributed to this blog.

A little more than a year ago, the Gates Foundation commissioned the University of Oxford to look at the question of how mobile money affects monetary policy. This is an important question for policymakers and one that has emerged as a fear from time to time in the central banker community.

The research shows that the growth of mobile money will be neutral or (if anything) beneficial to the conduct of well-designed monetary policy. This is a solid new brick in our fact base around digital financial services.*


The core questions in the research are whether the advent of mobile money affects inflation, what are the main channels through which this could happen, and how should central bank monetary policy be designed to control it.

Authors Christopher S. Adam and Sebastien E. J. Walker found that for central banks that are pursuing a “last-century” approach of “quantity targeting,” mobile money may negatively impact monetary policy. They note that mobile money has the potential to impact the demand for money and the money multiplier. The authors identify various channels for these impacts:

• The impact on money demand is negative – that is, people need less cash to support a given level of transactions.

• The impact on the multiplier (or the ratio of broad money to reserve money held in the central bank) is unpredictable because as people and banks switch away from cash they can move to things that affect either the top or bottom of this ratio.

Central banks employing “quantity targeting” use their control over the supply of reserve money to try to keep inflation in check. The money multiplier is the relevant parameter that tells the central bank how a given level of reserve money translates into more or less total money in the economy. If this parameter fluctuates unpredictably due to innovations – of which mobile money is just one – a strategy of setting reserve money to control inflation becomes difficult. In theory, then, mobile money could negatively impact monetary policy.

That said, the reason every developed economy and most developing ones have abandoned “quantity targeting” is precisely because the strategy is vulnerable to financial innovation (e.g. the spread of credit cards, mobile money, the Internet, PayPal, new types of loans, etc.). Most countries now target inflation with a strategy of dynamically manipulating interest rates. To the extent that countries have adopted modern monetary frameworks using interest rates (which all in East Africa are starting to do), the impact of mobile money is highly likely to be beneficial and enhance rather than undermine the efficacy of monetary policy implementation.

The researchers use a theoretical model to show that the presence of mobile money should not only help the central bank to stabilize inflation but at the same time promote greater macroeconomic stability in the rest of the economy, with the main gains accruing to households in the rural economy for whom mobile money-enabled access to asset markets provides partial insurance against economic volatility.

A micro- and macro-economic perspective

There is a paucity of literature relating specifically to mobile money and its economic impact. The overview paper by Janine Aron fills a gap by exploring the different channels of economic influence of mobile money from both a micro and a macro perspective, and critically surveying the current state of micro and macro literature on the economic effects of mobile money. The paper also addresses important regulatory issues affecting the implementation and future development of mobile money.

Data analysis

Researchers Aron, John Muellbauer and Rachel Sebudde model and forecast monthly food and non-food inflation in East Africa to test for the possible effects of mobile money. The model estimated for Uganda over 1994-2013 is a considerable advance on previous work, most of which neglected the important role of rainfall, trade openness and the increasing integration of Uganda in the regional economy.

While there are various theoretical channels whereby mobile money could increase or decrease inflation (see the survey), the data show no impact of mobile money on inflation. These findings suggest that concerns regarding the potential velocity-inflation linkage of mobile money are misplaced. It is more likely that the productivity and efficiency gains of mobile money have reduced inflation, even when quality improvements may not be fully measured in the Consumer Price Index.

For example, mobile money could make the effects of droughts and floods less disruptive by improving the matching of supply and demand of goods and services, and with lower transactions costs. With only five years of data since mobile money was introduced in Uganda, there must be considerable uncertainty over its long-term consequences for efficiency gains but the evidence strongly suggests there is no reason for any alarm over its potentially inflationary consequences. Moreover, the ratio of mobile balances to M3 (a broad measurement of money supply) was only 1.5 percent at the end of 2013 -– not significant enough to have any effect at the macro-level.

These results shed new clarity on the implications of mobile money for monetary policy and provide a useful policy guidepost for central bankers concerned about the advent of mobile financial innovation in their economies.

* The research is all linked on a main page here. The outputs of the research include: “Leapfrogging’: a Survey of the Nature and Economic Implications of Mobile Money,” by Janine Aron;? “Does mobile money cause inflation? Evidence from inflation models for Uganda: A ?policy ?brief,?” by Aron and John Muellbauer;? “Inflation forecasting models for Uganda:? Is mobile money relevant??” by Aron, Muellbauer and Rachel Sebudde;? “Mobile Money and Monetary Policy in East African Countries?,” by Christopher S. Adam and Sebastien E. J. Walker; and? “Mobile Money and Monetary Policy in East Africa: A policy brief?,” by Adam and Walker.

Jake Kendall is deputy director, research and innovation, in the Financial Services for the Poor initiative at the Bill & Melinda Gates Foundation.

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