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Understanding Inflation in Malawi: A Quantitative Investigation

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  • Dong Frank Wu

Abstract

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.

Suggested Citation

  • Dong Frank Wu, 2017. "Understanding Inflation in Malawi: A Quantitative Investigation," IMF Working Papers 2017/048, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2017/048
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