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

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authorities pursue both price stability and high growth and employment objectives. It is furthershown that price stability is the principal objective of monetary policy in the country. With theexception of exchange rate shocks, however, consumer prices respond weakly to monetaryimpulses suggesting that inflation in Malawi may not be predominated by monetary factors. Thefact that food costs have a preponderant weight (58.1 percent) in the all items national compositeconsumer price index reveals that structural rigidities in food production may be more importantdeterminants of inflation than monetary considerations.The study also illustrates that bank lending, exchange rates and aggregate money supply containimportant additional information in the transmission process of monetary policy shocks inMalawi. Besides own shocks, output fluctuations are largely attributed to M2 up to about a year,exchange rates at about 2 years and bank lending from about 3 years and beyond. Excluding ownshocks, variations in consumer prices are mostly accounted for by exchange rates up to about 3years and bank lending thereafter. M2 accounts for less than 1 percent of the consumer pricefluctuations across the five-year forecast horizon.Truncating the study period to include only the flexible exchange rate period (post-1994) revealsa number of interesting issues. First, the role of the exchange rate becomes more conspicuousalthough its impact on economic activity is weakened. Second, the importance of aggregatemoney supply and bank lending in transmitting monetary policy impulses is enhanced. It isconcluded, therefore, that with the floatation of the Malawi Kwacha in 1994, the monetarytransmission process evolved from a weak, blurred process to a somewhat strong, lessambiguous mechanism, consistent with theoretical expectations.Several policy issues emerge from the findings of this study. First, monetary authorities inMalawi need to consider moving away from using hybrid operating procedures to a scalarindicator of policy. The recommendation is to abandon the use of reserve money as a measure ofmonetary policy in favour of the more effective bank rate. RBM may, nonetheless, retain OMOas a vehicle for government borrowing on the domestic market through TBs and sterilising theimpact of this undertaking through RBM Bills.Second, the evidence that RBM also targets economic growth and employment objectivesbesides price stability suggests that the bank may be overloaded and hence unable to achieve itstargeted objectives due to inefficiencies arising from the multiple objectives. We suggest that thebank should narrow down its focus to concentrate on price stability and this should be reflectedin the RBM Act which governs its operations. In the literature, there is near consensus that toachieve the maximum attainable level of sustainable economic growth, the main objective ofmonetary policy should be price stability. Accordingly, we do not expect the governmentobjective of promoting economic growth and employment to be compromised with the centralbank‟s a focus on a single objective, namely price stability.32 | P a g e
REFERENCESBanda, W. (2004). Exchange Rate Management Under Monetary Targeting. Dealers Associationof Malawi lakeshore Conference (pp. 1-21). Mangochi: DEAMA.Becklelmans, L. (2005). Credit and Monetary Policy: An Australian SVAR. Reserve Bank ofAustralia Research Discussion Paper 2005-06 , 2005 (September), 1-29.Bernanke, B. (1986). Alternative Explanations of the Money-Income Correlation. NBERWorking Paper Series (NBER Working Paper Number 1842), 1-62.Bernanke, B. (1996). What Does the Bundesbank Target? NBER Working Paper Series (WP5764), 1-42.Bernanke, B., & Gertler, M. (1995). Inside the Black Box: The Credit Channel of MonetaryPolicy Transmission. Journal of Economic Perspectives , 9 (4), 27-48.Bernanke, B., & Mihov, I. (1995, May). Measuring Monetary Policy. National Bureau ofEconomic Research Working Paper WP-97-7 .Bernanke, B., & Mihov, I. (1998). Measuring Monetary Policy. The Quaterly Journal ofEconomics , 113 (3), 869-902.Bernanke, B., & Mihov, I. (1996). What Does the Bundesbank Target? NBER Working PaperSeries (Working Paper No. 5764), 1-42.Blundell-Wignall, A., & Gizycki, M. (1992). Credit Supply and DEmand and the AustralianEconomy. Reserve Bank of Australia Discussion Papers (Discussion paper No. 9208).Bolnick, B. (1991). Weak Links in the Monetary Transmission Mechanism: The Case of Malawi.ODI/HIID Conference on Improving Monetary policy in Africa and Asia (pp. 1-27). Harvard:ODI/HIID.Borys, M. M., & Horvath, R. (2007). The Effects of Monetary Policy in the Czech republic: AnEmpirical Study. CERGE-EI Working Paper Series (339), 1-26.Brischetto, A., & Voss, G. (1999). A Structural Vector Autoregression Model of MonetaryPolicy in Australia. Reserve Bank of Australia Research Discussion Paper Series (Discussionpaper No. 1999-11).Cheng, K. C. (2006). A VAR Analysis of Kenya's Monetary Policy Transmission Mechanism:How Does the Central Bank's REPO Rate Affect the Economy? IMF Working Paper(WP/06/300), 1-26.Chipeta, C., & Mkandawire, M. (1991). The Informal Financial Sector and MacroeconomicAdjustment in Malawi. AERC Research paper Series (Research Paper 4), 1-58.Christiano, L., Eichenbaum, M., & Evans, C. (1998). Monetary Policy Shocks: What have weLearned and to What End? NBER Working Paper Series (Working Paper Number 6400), 1-77.Clarida, R., & Gertler, M. (1996). How the Bundesbank Conducts Monetary Policy. NBERWorking Paper Series (Working Paper No. 5581), 1-50.33 | 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 18 and 19: Figure 4.4 also shows that an expan
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 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

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