A Vector Autoregression Analysis of Price and Exchange Rate Dynamics in Malawi
Author | : Kisu Simwaka |
Publisher | : |
Total Pages | : 0 |
Release | : 2004 |
ISBN-10 | : OCLC:1375338082 |
ISBN-13 | : |
Rating | : 4/5 (82 Downloads) |
Download or read book A Vector Autoregression Analysis of Price and Exchange Rate Dynamics in Malawi written by Kisu Simwaka and published by . This book was released on 2004 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper investigates the relationships between domestic and foreign price levels and the exchange rate and other macro-variables. The results indicate that exchange rate, foreign rate of inflation and domestic credit drive the rate of inflation with no feedback effects. What are the policy implications of the study? The findings in this analysis offer significant challenges to the formulation of inflation policy in Malawi. First, the presence of co-integration or long run co-movements between variables, from a policy point of view, indicates the effectiveness of targeting inflation rate in influencing the long run movements of other variables. Second, developments in the external sector of the economy seemingly contribute more to domestic inflation rate. The policy implications are that the government ability in influencing the behavior of domestic inflation is limited. This is because the ability of a small open economy like that of Malawi to insulate itself from external shocks is limited. Finally, it might be interesting to determine whether and how domestic supply constraints raise inflation. This may involve, for instance, using smallholder maize or cereal output as one of the explanatory variables. Inflationary control in Malawi has been emphasized on non-food inflation through controlling money supply leaving out the supply constraint. But evidence shows that food costs constitute 58.1 percent of the inflation basket. Inflationary control should therefore go beyond monetary instruments to address the supply constraints in the real sector. This brings into focus the management of crises associated with droughts.