Monetary Policy Response to Foreign Aid in an Estimated DSGE Model of Malawi
AbstractThis paper estimates a Bayesian Dynamic Stochastic General Equilibrium (DSGE) model of Malawi and uses it to account for short-run monetary policy response to aid inflows between 1980 and 2010. In particular, the paper evaluates the existence of a â€œDutch Diseaseâ€ following an increase in foreign aid and examines the Reserve Bank of Malawi (RBM) reaction to aid inflows under different monetary policy rules. The paper finds strong evidence of â€œTaylor ruleâ€ like response of monetary policy to aid inflows. It also shows that a â€˜Dutch Diseaseâ€™ did not exist in Malawi because aid inflows were found to be associated with currency depreciation and not the expected real currency appreciation. There is also evidence of a low impact of a positive aid shock on currency depreciation and inflation when RBM engages in targeting monetary aggregates than when the authorities use the Taylor rule and incomplete sterilisation.
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Bibliographic InfoPaper provided by Economic Research Southern Africa in its series Working Papers with number 350.
Length: 39 pages
Date of creation: 2013
Date of revision:
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Taylor rule; DSGE model; Rule-of-Thumb; Spending; Absorption; Foreign exchange Rate;
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-2013-06-16 (Africa)
- NEP-ALL-2013-06-16 (All new papers)
- NEP-CBA-2013-06-16 (Central Banking)
- NEP-DGE-2013-06-16 (Dynamic General Equilibrium)
- NEP-MAC-2013-06-16 (Macroeconomics)
- NEP-MON-2013-06-16 (Monetary Economics)
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