SECTORAL EFFECTS OF MONETARY POLICY IN MALAWI

Abstract

The sectoral effects of monetary policy in Malawi were analyzed in this study using the recursive VAR methodology. Specifically, the study sought to examine the differential effects of monetary policy on sectoral output and to examine the role of the exchange rate channel of monetary policy transmission in explaining these monetary policy effects. The analysis was carried out on annual time series data from 1980-2014. Sectors which are the key drivers of Malawi‟s GDP growth were analyzed. These include agriculture, manufacturing, and services. The analysis was based on pair wise granger causality tests and innovation accounting. The results indicate the presence of granger causality running from the exchange rate to agriculture output hence suggesting the importance of the exchange rate channel in agriculture. Furthermore, variance decomposition revealed that the exchange rate channel is the most effective monetary policy transmission channel in the agriculture sector whereas the interest rate channel was found to be most effective in the manufacturing and services sectors. It was hence concluded that the exchange rate does not better explain the sectoral effects of monetary policy in Malawi compared to the other channels. On the other hand, analysis of the impulse response functions showed that monetary policy shocks have differential impacts on output of all sectors. Thus, based on the findings, it is recommended that the RBM, in addition to encouraging entry and competition in the financial sector, must also leverage on its role as advisor to the government in order to positively affect sectoral output.