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Credit-Supply Factors and Malawian Business Cycles

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  • Kumwenda, Thomson
  • Mangani, Ronald
  • Mazalale, Jacob
  • Silumbu, Exley

Abstract

This study investigates the role of credit-supply factors in Malawian business cycles. A developing country banking sector is embedded into a Bayesian DGSE model using data for Malawi for the period 2004 to 2020. Financial intermediation in the model includes the issuance of loans to both households and firms, deposit mobilization, and actively financing of public debt to a cash-constrained central government treasury. Our study finds that banking sector shocks emanating from financing public debt plays a significant role in explaining variations in output in Malawi, both in the short and long run. Our study also finds that shocks from banking sector profits, intermediation role to household loans, entrepreneurs and firms do not have adverse effects on the fluctuation of output in Malawi which is contrary to the public sentiments. We also established that these shocks crowd-out private sector credit supply, and hence push interest rates up in the face of a liquidity-constrained treasury. These crowding outcomes are in the form of a trade-off of investment opportunities for banks. For every excess fund above the regulatory liquidity threshold, banks are more likely induced to invest only 20.96% in loans to households and 19.56% in loans to firms.

Suggested Citation

  • Kumwenda, Thomson & Mangani, Ronald & Mazalale, Jacob & Silumbu, Exley, 2022. "Credit-Supply Factors and Malawian Business Cycles," Dynare Working Papers 77, CEPREMAP.
  • Handle: RePEc:cpm:dynare:077
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    References listed on IDEAS

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    More about this item

    Keywords

    Public Debt; Collaterals; Banks; Interest Rates; Crowding-Out;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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