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Dynamic Effects of Monetary Policy Shocks in Malawi

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  • Harold Ngalawa

    ()
    (School of Economics and Finance, University of KwaZulu-Natal)

  • Nicola Viegi

    ()
    (Department of Economics, University of Pretoria)

Abstract

This paper sets out to investigate the process through which monetary policy affects economic activity in Malawi. Using innovation accounting in a structural vector autoregressive model, it is established that monetary authorities in Malawi employ hybrid operating procedures and pursue both price stability and high growth and employment objectives. Two operating targets of monetary policy are identified, viz., bank rate and reserve money, and it is demonstrated that the former is a more effective measure of monetary policy than the latter. The study also illustrates that bank lending, exchange rates and aggregate money supply contain important additional information in the transmission process of monetary policy shocks in Malawi. Furthermore, it is shown that the floatation of the Malawi Kwacha in February 1994 had considerable effects on the country’s monetary transmission process. In the post-1994 period, the role of exchange rates became more conspicuous than before although its impact was weakened; and the importance of aggregate money supply and bank lending in transmitting monetary policy impulses was enhanced. Overall, the monetary transmission process evolved from a weak, blurred process to a somewhat strong, less ambiguous mechanism.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201112.

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Length: 28 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:pre:wpaper:201112

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Cited by:
  1. Daniel C. Hickman & William W. Olney, 2011. "Globalization and Investment in Human Capital," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 64(4), pages 654-672, July.
  2. Prachi Mishra & Peter Montiel, 2012. "How Effective is Monetary Transmission in Low-Income Countries? A Survey of the Empirical Evidence," IMF Working Papers, International Monetary Fund 12/143, International Monetary Fund.
  3. Mishra, Prachi & Montiel, Peter J & Spilimbergo, Antonio, 2010. "Monetary transmission in low income countries," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7951, C.E.P.R. Discussion Papers.
  4. Mishra, Prachi & Montiel, Peter J & Spilimbergo, Antonio, 2011. "How Effective Is Monetary Transmission in Developing Countries? A Survey of the Empirical Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8577, C.E.P.R. Discussion Papers.
  5. Deraniyagala, Sonali & Kaluwa, Ben, 2011. "Macroeconomic policy for employment creation: The case of Malawi," MPRA Paper 52715, University Library of Munich, Germany.
  6. Asongu Simplice, 2013. "Correcting inflation with financial dynamic fundamentals: which adjustments matter in Africa?," Working Papers 13/003, African Governance and Development Institute..
  7. Asongu Simplice, 2013. "New Empirics of monetary policy dynamics: evidence from the CFA franc zones," Working Papers 13/016, African Governance and Development Institute..
  8. Asongu, Simplice A, 2013. "Does Money Matter in Africa? New Empirics on Long- and Short-run Effects of Monetary Policy on Output and Prices," MPRA Paper 48494, University Library of Munich, Germany.
  9. Chance Mwabutwa & Manoel Bittencourt & Nicola Viegi, 2013. "Evolution of Monetary Policy Transmission Mechanism in Malawi: A TVP-VAR Approach," Working Papers, University of Pretoria, Department of Economics 201327, University of Pretoria, Department of Economics.

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