Dynamic Effects of Monetary Policy Shocks in Malawi* - African ...

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Figure 4.4 also shows that an expansionary monetary shock equivalent to a 7.6 percent suddenincrease in reserve money causes an increase in output, peaking at 1.4 percent above baselineafter 15 months. The price puzzle, however, disappears with reserve money as an operatingtarget. Consumer prices respond to the unexpected increase in reserve money with an increasewhich peaks at 0.4 percent above baseline after 10 months. Overall, shocks to either of themonetary policy operating targets attract significant output responses and insignificant consumerprice responses, suggesting that monetary factors may not be primary determinants of inflation inMalawi. This finding is supported by the preponderant weight of food costs (58.1 percent) in therepresentative basket of commodities used for measuring national consumer price indices, whichindicates that structural rigidities in food production may be more a important cause of inflationthan monetary variables.FIGURE 4.4: Impulse Responses of Output and Consumer Prices: The Generic ModelResponse of GY to BRResponse of GY to RMResponse of BR to BR.12.123.08.082.04.041.00.000-.04-.04-1-.0810 20 30 40 50 60-.0810 20 30 40 50 60-210 20 30 40 50 60Response of CP to BRResponse of CP to RMResponse of RM to RM.06.06.12.04.04.08.02.00.02.00.04-.02-.02.00-.04-.04-.04-.0610 20 30 40 50 60-.0610 20 30 40 50 60-.0810 20 30 40 50 60To determine the relative importance of each structural innovation in explaining fluctuations ofthe variables in the generic model, Table 4.1 presents variance decompositions for each variablein the model over a five-year forecast horizon. Given the two policy goals, fluctuations in boththe bank rate and reserve money are dominated by consumer prices, connoting that the principalobjective of monetary policy in the country is price stability. While shocks to consumer pricesaccount for 13.1 percent of the bank rate fluctuations after 6 months, 18.6 percent after a yearand 21.9 percent after 2 years, output shocks account for 8.2 percent of the bank rate fluctuationsafter 6 months, 14.7 percent after a year and 17.4 percent after 2 years. Shocks to consumerprices also account for 3.4 percent of the reserve money fluctuations after 6 months, 10.7 percentafter a year and 25.5 percent after 2 years while shocks to output account for 4.8 percent of thereserve money fluctuations after 6 month, 9.8 percent after a year and 16.3 percent after twoyears.18 | P a g e
TABLE 4.1: Variance Decomposition for the Generic ModelVariance Decomposition of GYMonth GY CP BR RM1 100 0 0 06 92.3109 2.26977 4.85201 0.5672812 76.8961 11.7495 7.83193 3.5224824 55.1723 30.9392 5.84306 8.0454536 45.2397 42.9679 4.38645 7.4059848 40.2602 49.4123 4.79446 5.5330560 37.3931 52.581 5.96782 4.0581Variance Decomposition of CPMonth GY CP BR RM1 0.00429 99.9957 0 06 8.83843 89.5588 0.70214 0.9006512 17.2802 79.9114 1.4836 1.3247224 23.9426 71.2309 3.73211 1.0944536 26.3566 67.0872 5.87991 0.6763348 27.408 64.4648 7.65085 0.4763560 27.9006 62.5823 9.06388 0.45322Variance Decomposition of BRMonth GY CP BR RM1 0 0 100 06 8.22009 13.0522 76.6691 2.0586212 14.6781 18.6407 60.9944 5.686724 17.4205 21.865 50.6677 10.046836 17.7836 22.7513 47.3985 12.066648 17.8461 23.0723 46.0195 13.062260 17.8509 23.1937 45.3665 13.5889Variance Decomposition of RMMonth GY CP BR RM1 0 0 0.62107 99.37896 4.82833 3.42472 0.25099 91.49612 9.83185 10.6703 0.17049 79.327324 16.3189 25.4689 0.50491 57.707436 20.3133 36.1984 1.78088 41.707448 22.8209 42.7248 3.50981 30.944560 24.3806 46.4778 5.22628 23.915419 | P a g e
Page 1 and 2: University of Cape TownSchool of ec
Page 3 and 4: Among the few studies undertaken on
Page 5 and 6: Interest Rate (Percent)In line with
Page 7 and 8: 3.2. Identification of Structural S
Page 9 and 10: The non-zero coefficients and in ma
Page 11 and 12: only the price level in the long ru
Page 13: long-run relationships in a linear
Page 16 and 17: Percent(RM-Innovations)Percent (BR-
Page 20 and 21: Table 4.1 also reveals that the dif
Page 22 and 23: To determine the importance of the
Page 24 and 25: FIGURE 4.7: Impulse Responses for t
Page 26 and 27: Figure 4.9:Responses to Structural
Page 28 and 29: ates) is re-estimated with the samp
Page 30 and 31: TABLE 4.2: Variance Decomposition -
Page 32 and 33: authorities pursue both price stabi
Page 34 and 35: Dabla-Norris, E., & Floerkemeier, H
Page 36 and 37: APPENDIX AInterpolation of GDP usin
Page 38 and 39: GDPMalawi Kwacha (millions)about 10
Page 40 and 41: APPENDIX BB-1.0. Data PropertiesCoi
Page 42 and 43: Table B1: Stationarity ResultsVaria
Page 44 and 45: Table B3: Johansen Cointegration Te
Page 46 and 47: APPENDIX CTABLE C1: Roots of Charac
Page 48 and 49: APPENDIX CTABLE C3: Structural VAR
Page 50 and 51: APPENDIX CTABLE C5: Roots of Charac
Page 52 and 53: APPENDIX DFIGURE D1:Impulse Respons

Dynamic Effects of Monetary Policy Shocks in Malawi* - African ...

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