Understanding Inflation in Malawi: A Quantitative Investigation
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Summary:
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.
Series:
Working Paper No. 2017/048
Subject:
Exchange rate arrangements Exchange rates Floating exchange rates Foreign exchange Inflation Monetary base Money Prices
English
Publication Date:
March 9, 2017
ISBN/ISSN:
9781475585988/1018-5941
Stock No:
WPIEA2017048
Pages:
30
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