Fiscal and monetary policy rules in Malawi:a New Keynesian DSGE analysis

Joseph Upile Matola and Roberto Leon-Gonzalez
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Joseph Upile Matola: National Graduate Institute for Policy Studies, Tokyo, Japan / bMinistry of Finance, Economic Planning, and Development, Lilongwe, Malawi

No 19-03, GRIPS Discussion Papers from National Graduate Institute for Policy Studies

Abstract: In this paper, Malawi’s fiscal and monetary policy rules are estimated and their effects and influence on key macroeconomic variables analyzed in a New Keynesian DSGE framework. Bayesian estimation is used to estimate the model using data on consumption, investment, inflation, nominal interest rate, government spending, consumption tax revenue, and income tax revenue. It is found that monetary policy in Malawi follows a Taylor type interest rate rule in which interest rates respond strongly to changes in inflation, in accordance with the “Taylor principle”, and only mildly to output fluctuations. Fiscal policy too reacts to output fluctuations in a modest fashion. With regards to the main drivers of output fluctuations, it is shown that although fiscal and monetary policy shocks play a significant role, it is actually productivity shocks and to a lesser extent cost-push and preference shocks that are the main contributors to business cycles.

Pages: 47 pages
Date: 2019-04
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ngi:dpaper:19-03

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