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


  • Chance Mwabutwa, Manoel Bittencourt and Nicola Viegi


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 have 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 a 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.

Suggested Citation

  • Chance Mwabutwa, Manoel Bittencourt and Nicola Viegi, 2013. "Evolution of Monetary Policy Transmission Mechanism in Malawi: A TVP-VAR with Stochastic Volatility Approach," Working Papers 387, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:387

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    1. Johane Dikgang and Edwin Muchapondwa, 2013. "The Economic Evaluation of Dryland Ecosystem Services in the South African Kgalagadi Area and Implications for PES Involving the Khomani San," Working Papers 384, Economic Research Southern Africa.
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    Cited by:

    1. Emmanuel Owusu-Sekyere, 2016. "The impact of monetary policy on household consumption in South Africa. Evidence from Vector Autoregressive Techniques," Working Papers 598, Economic Research Southern Africa.
    2. Malik Qasim KHASAWNEH, 2015. "The Impact of Monetary policy on Consumption and Investment in Jordan during (1989-2013)," Journal of Economics Library, KSP Journals, vol. 2(3), pages 155-164, September.

    More about this item


    Transmission Mechanism; price puzzle; Financial Reforms; Bayesian TVP-VAR;

    JEL classification:

    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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