Understanding Inflation in Malawi: A Quantitative Investigation

Dong Frank Wu

No 2017/048, IMF Working Papers from International Monetary Fund

Abstract: This paper focuses on the role of the pass-through of the exchange rate and policydeterminants in driving inflation. Using linear and nonlinear frameworks, the paper finds: (i) after the switch to a floating exchange rate regime in 2012, nonfood prices not only directly influence headline inflation, but also have an significant impact on food inflation via second round effects; (ii) the pass-through of the exchange rate to headline inflation has jumped from zero to 11 percent under the floating regime, after controlling for other factors; (iii) the improved significance of T-bill rates in shaping inflation flags its importance in Malawi’s monetary framework although the monetary transmission mechanism needs further strengthening; (iv) the increased impact of broad money underscores the necessity for fiscal discipline and central bank independence.

Keywords: WP; headline inflation; Inflation; Exchange Rate; Pass-through; Regime Switch; food inflation; inflation dynamics; inflation volatility; inflation expectation; T-bill rate; inflation fluctuation; exchange rate expectation; Exchange rate arrangements; Monetary base; Exchange rates; Floating exchange rates; Global (search for similar items in EconPapers)
Pages: 30
Date: 2017-03-09
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