The Effects of Monetary Policy on Prices in Malawi
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Date
2020-04-27
Authors
Mangani, Ronald
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
Evidence on the transmission mechanism of monetary policy is quite non-uniform,
particularly across countries with different economic structures. Complications to
theoretical propositions tend to arise when economies are less market-oriented and
less sensitive to policy interventions, when monetary authorities are not adequately
independent, or when market-based and administrative policy instruments are used
concurrently. It is important, therefore, to appreciate the unique dynamics of the
transmission mechanism in any jurisdiction, in order to understand and possibly
predict the macroeconomic effects of monetary policy. This study assessed the effects
of monetary policy in Malawi by tracing the channels of its transmission mechanism,
while recognizing several factors that characterize the economy: market imperfections,
fiscal dominance and vulnerability to external shocks. Within the environment of
vector autoregressive modelling, Granger-causality and block exogeneity tests as
well as innovation accounting analyses were conducted to describe the dynamic
interrelationships among monetary policy, financial variables and prices. The study
established the lack of unequivocal evidence in support of a conventional channel of
the monetary policy transmission mechanism, and found that the exchange rate was
the most important variable in predicting prices. Therefore, the study recommends
that authorities should be more concerned with imported cost-push inflation rather
than demand-pull inflation. In the short term, pursuing a prudent exchange rate policy
that recognizes the country’s precarious foreign reserve position could be critical in
deepening domestic price stability. Beyond the short term, price stability could be
sustained through the implementation of policies directed towards building a strong
foreign exchange reserve base, as well as developing a sustainable approach to the
country’s reliance on development assistance.