Fiscal Multipliers and Evidence on Effectiveness of Fiscal Policy in Malawi

This study sheds light on the effects of fiscal policy on the Malawian economy by measuring the value of different Keynesian multipliers and identifying the possible origins of GDP fluctuation. The quantitative method adopted is the Bayesian estimation of a Dynamic and Stochastic General Equilibrium (DSGE) model based on data from the National Statistic Office and Reserve Bank of Malawi over the period 2004Q1-2020Q2. The Keynesian multiplier for government expenditure has been estimated at -0.81 and -1.50 at impact and remains negatively strong in subsequent periods for Output and positive for subsequent period for private investments or aggregate demand; (iii) an decrease in consumption taxes has a positive impact on national production, private investments and negative impact on general consumption, the consumption tax multiplier has been estimated at 1.22 for GDP, 0.69 for private investments and -0.64 for consumption for Ricardians households. (iii) the decrease of employment tax has a negative impact on GDP, private investments and positive impact on consumption for Non Ricardians households. This study shows that overall, the variability of production and private consumption is due in large part to public investment and monetary policy shocks, and this effect is persistent and significant over time. The effects of the public investment shock diminish over time, while those relating to the consumption tax are increases over time.