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Dynamic Effects of Monetary Policy Shocks in Malawi

  • Harold Ngalawa

    ()

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

  • Nicola Viegi

    ()

    (Department of Economics, University of Pretoria)

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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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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