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Evolution of Monetary Policy Transmission Mechanism in Malawi: A TVP-VAR with Stochastic Volatility Approach

Chance Mwabutwa, Manoel Bittencourt and Nicola Viegi
Authors registered in the RePEc Author Service: Manoel Bittencourt and Nicola Viegi ()

No 387, Working Papers from Economic Research Southern Africa

Abstract: This paper investigates the evolution of monetary transmission mechanism in Malawi between 1981 and 2010 using a time varying parameter vector autoregressive (TVP-VAR) model with stochastic volatility. We evaluate how the responses of real output and general price level to bank rate, exchange rate and credit shocks have changed over time since Malawi adopted financial reforms in 1980s. The paper finds that inflation, real output and exchange rate responses to monetary policy shocks changed over the period under review. Importantly, beginning mid-2000, the monetary policy transmission performed consistently with predictions of economic theory and there is no evidence of a price puzzle as found in the previous literature on Malawi. However, the statistical significance of the private credit supply remains weak and this calls for more financial reforms targeting the credit market which can contribute to monetary transmission and promote further economic growth in Malawi.

Keywords: Transmission Mechanism; price puzzle; Financial Reforms; Bayesian TVP-VAR (search for similar items in EconPapers)
JEL-codes: C49 D12 D91 E21 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr, nep-cba, nep-mac and nep-mon
Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:rza:wpaper:387

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