Author(s)

Hopestone Kayiska Chavula

Macroeconomic Policy Division, Economic Commission for Africa, Addis Ababa, Ethiopia.

This study tries to develop and use a small macroeconometric model to capture the main short-term macro dynamics and to forecast major macroeconomic variables of the Malawian economy. The results show that a reduction in the policy rate leads to a fall in the lending rate, but with an increase in money supply, and with an insignificant impact on output growth. The results suggest that monetary authorities in Malawi have to make a choice between the objectives of maintaining lower money supply and lowering the lending rate. The results also suggest that, despite the Reserve Bank of Malawi Act of 1989 stipulating that monetary authorities should pursue both price and high growth and employment objectives, our results reveal that price stability is the principal objective of monetary policy in the country. Suggesting that monetary authorities in the country should not only place more emphasis on the objective of stabilization and achieving low inflation, but also focus on supporting strong, sustained and shared growth. To some extent further suggesting that emphasis should be placed on policies and strategies aimed at structurally transforming the Malawian economy so that the monetary policies’ impact should translate into an increase in the country’s output and growth. Further suggesting enhanced effective coordination between fiscal and monetary policies.

Macroeconometric Models, Policy Rate, Policy Simulations, Malawian Economy

Chavula, H. (2016) Monetary Policy Effects and Output Growth in Malawi: Using a Small Macroeconometric Model. Open Journal of Modelling and Simulation, 4, 169-191. doi: 10.4236/ojmsi.2016.44013.