Monetary Policy Response to Capital Inflows in Form of Foreign Aid in Malawi
AbstractThis paper estimates the Bayesian dynamic stochastic general equilibrium (DSGE) model and uses the model to account for the short-run monetary policy response to increased aid inflows in Malawi. The estimates reveal that the monetary authorities reacted to increased foreign aid inflows the same way as was experienced in other African countries. The model also suggests that there was non-existence of the threats of the ‘Dutch Disease’ in contrast to what was found in Mozambique. The country can continue to receive aid by targeting the supply side of the economy with an aim of improving the competiveness of the export sector. Evidently, the conduct of monetary policy performs better under the assumption of full accessibility of financial assets. In addition, the impact of aid inflows on depreciation and inflation are much smaller when monetary authorities indulge in money targeting other than following the Taylor rule and incomplete sterilisation. On the small note, the study suggests that actual spending of aid should be aligned with the actual absorption of increased aid. Nevertheless, the outcome of the aid effects has been clouded out by the limitation of the exchange rate management in Malawi.
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Bibliographic InfoPaper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201232.
Length: 38 pages
Date of creation: Dec 2012
Date of revision:
Taylor Rule; DSGE Model; Rule-of-Thumb; Spending; Absorption; Foreign Exchange Rate; Bayesian Methods;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F35 - International Economics - - International Finance - - - Foreign Aid
This paper has been announced in the following NEP Reports:
- NEP-AFR-2012-12-10 (Africa)
- NEP-ALL-2012-12-10 (All new papers)
- NEP-CBA-2012-12-10 (Central Banking)
- NEP-DGE-2012-12-10 (Dynamic General Equilibrium)
- NEP-MAC-2012-12-10 (Macroeconomics)
- NEP-MON-2012-12-10 (Monetary Economics)
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