Monetary Policy Response to Foreign Aid in an Estimated DSGE Model of Malawi
Chance Mwabutwa, Manoel Bittencourt and Nicola Viegi
Authors registered in the RePEc Author Service: Manoel Bittencourt and
Nicola Viegi ()
No 350, Working Papers from Economic Research Southern Africa
This paper estimates a Bayesian Dynamic Stochastic General Equilibrium (DSGE) model of Malawi and uses it to account for short-run monetary policy response to aid inflows between 1980 and 2010. In particular, the paper evaluates the existence of a "Dutch Disease" following an increase in foreign aid and examines the Reserve Bank of Malawi (RBM) reaction to aid inflows under different monetary policy rules. The paper finds strong evidence of "Taylor rule" like response of monetary policy to aid inflows. It also shows that a â€˜Dutch Diseaseâ€™ did not exist in Malawi because aid inflows were found to be associated with currency depreciation and not the expected real currency appreciation. There is also evidence of a low impact of a positive aid shock on currency depreciation and inflation when RBM engages in targeting monetary aggregates than when the authorities use the Taylor rule and incomplete sterilisation.
Keywords: Taylor rule; DSGE model; Rule-of-Thumb; Spending; Absorption; Foreign exchange Rate (search for similar items in EconPapers)
JEL-codes: C11 C13 E52 E62 F31 F35 (search for similar items in EconPapers)
Pages: 39 pages
New Economics Papers: this item is included in nep-afr, nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:rza:wpaper:350
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