Fiscal and Monetary Policy Interactions in Malawi: Evidence from Backward-Looking and Forward-Looking Approaches

Salim A. Mapila

African Journal of Economic Review, 2024, vol. 12, issue 4

Abstract: The accommodation of fiscal profligacy by the Reserve Bank of Malawi (RBM) has long been an issue of concern among advocates for central bank independence in the country. This concern has over the years fuelled suspicions of fiscal dominance in the Malawian economy. Empirically, two traditional approaches have been used to distinguish between a fiscally-dominant regime and a monetary-dominant regime: the backward-looking and forward-looking approaches. Both approaches use the dynamic interrelation between public liabilities and primary surpluses to unearth this dominance relationship. Accordingly, this study employed the two approaches, using time series quarterly data spanning 2013:01-2024:01, to show that suspicions of fiscal dominance in Malawi are empirically exaggerated. On the contrary, the study found that the Malawian economy is predominantly characterised by a monetary-dominant regime – albeit with probable regime shifts to fiscal dominance at times. Such findings affirm the independence of the RBM and highlight its important role in working with the Ministry of Finance and Economic Affairs to create a conducive macroeconomic environment as emphasized in the national development vision – Malawi 2063. Particularly, the RBM is key in anchoring inflation expectations, promoting confidence in the currency, and fostering sustainable economic growth over the long term.

Keywords: Financial; Economics (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:ags:afjecr:362928

DOI: 10.22004/ag.econ.362928

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