From inclusion to sustainability: a novel framework for measuring financial inclusion and Its environmental consequences in Mexico

Abstract

Financial inclusion is traditionally measured through the construction of composite indices that aggregate access and usage variables related to financial services. These indices are often developed using conventional methodologies, such as the Human Development Index framework or Principal Component Analysis (PCA). In the existing literature, financial inclusion indices are typically calculated for a specific point in time, generating a ranking of units (e.g., countries or municipalities) for that period. New indices and rankings are then recalculated for subsequent periods, allowing for comparative analysis across time. Once computed, these indices can beused either as dependent or explanatory variables in the study of other phenomena of interest.aim of this research is to construct financial inclusion indices using multiple methodologies and to assess whether any specific approach yields superior results. In particular, the study emphasizes the development of intertemporal indices to monitor the evolution of financial inclusion both across municipalities and over time. A further objective is to explore whether there exists a relationship between financial inclusion and air pollution emissions.Chapter 2 presents the construction of financial inclusion indices using four distinct methodologies: (1) Principal Component Analysis (PCA), (2) the Human Development Index (HDI) approach, (3) Kernel-based nonlinear PCA, and (4) Non- negative Matrix Factorization (NMF). All indices are constructed using 2019 data on access and usage of financial services, provided by the Mexican financial regulatory authority. Chapter 3 extends the Non-negative Matrix Factorization (NMF) methodology introduced in Chapter 2 to construct a dynamic, intertemporal financial inclusion index. This chapter leverages quarterly data from 2013 to 2022, provided by the same financial regulatory authority, to track the evolution of financial inclusion across Mexican municipalities. The extended methodology allows for consistent measurement over time, enabling both cross-sectional and longitudinal analysis of financial access and usage patterns.Chapter 4 examines the relationship between the financial inclusion index and air pollutant emissions, specifically carbon monoxide (CO), for Mexican municipalities. The analysis is conducted using two cross-sectional datasets corresponding to the years 2013 and 2018. By linking financial inclusion to environmental outcomes, this chapter explores whether increased financial access and usage is associated with changes in pollution levels, providing insights into the potential environmental implications of financial development.