Does inflation undermine financial inclusion? A cross-country evidence from selected G20 economies using system GMM approach

Abstract
This study examines whether inflation undermines financial inclusion across a balanced panel of 75 countries drawn from the G20, European Union, and African Union over the period 2014–2024. A Composite Financial Inclusion Index (CFII) is constructed using a multidimensional approach capturing access, availability, and usage of formal financial services for households and enterprises. To address endogeneity, persistence, and cross-country heterogeneity, the analysis employs a dynamic System Generalized Method of Moments (System GMM) estimator. Inflation is the primary explanatory variable, while control variables include GDP per capita, government expenditure, trade openness, internet penetration, mobile subscriptions, domestic credit to the private sector, financial development, institutional quality, human capital, and labor market conditions. The findings reveal a statistically significant negative impact of inflation on financial inclusion, indicating that price instability erodes real savings, raises borrowing costs, and limits access to formal finance, particularly for small and medium-sized enterprises. Although financial development, digital infrastructure, and institutional quality positively influence inclusion, they do not fully offset inflation’s adverse effects. The results also confirm strong persistence in financial inclusion, highlighting its structural nature. The study underscores that macroeconomic stability is essential for achieving sustainable and inclusive financial systems.