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Evolution of Monetary Policy Transmission Mechanism in Malawi: A TVP-VAR Approach

  • Chance Mwabutwa


    (Department of Economics, University of Pretoria)

  • Manoel Bittencourt


    (Department of Economics, University of Pretoria)

  • Nicola Viegi


    (Department of Economics, University of Pretoria)

This paper investigates the evolution of monetary transmission mechanism in Malawi between 1981 and 2010 using a time varying parameter vector autoregressive (TVP-VAR) model with stochastic volatility. We evaluate how the responses of real output and general price level to bank rate, exchange rate and credit shocks changed over time since Malawi adopted financial reforms in 1980s. The paper finds that inflation, real output and exchange rate responses to monetary policy shocks changed over the period under review. Importantly, beginning mid-2000, the monetary policy transmission performed consistently with predictions of economic theory and there is no evidence of price puzzle as found in the previous literature on Malawi. However, the statistical significance of the private credit supply remains weak and this calls for more financial reforms targeting the credit market which can contribute to monetary transmission and promote further economic growth in Malawi.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201327.

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Length: 27 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:pre:wpaper:201327
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