RBM scrutinises impact of money supply on inflation

A recent study by the Reserve Bank of Malawi (RBM) has examined the relative importance of monetary factors in driving inflation in the country.

The study, ‘Money Supply and Inflation in Malawi: An Econometric Investigation’, conducted by Governor Dr Perks Ligoya, general manager Dr Grant Kabango and economists Dr Kisu Simwaka and Mtendere Chikonda, contributes to the on-going debate about inflation developments in Malawi and what monetary policy can do and cannot do.

The main objective of the study was to model and examine the relative importance of monetary factors for inflationary pressures in Malawi.

The study tries to answer the questions: Does money supply growth drive the domestic rate of inflation? Does exchange rate movements and the world rate inflation drive the domestic inflation rate?; What variables are relatively more important in driving the domestic rate of inflation? As well as what is it monetary policy can do and cannot do in Malawi?

The study has revealed that inflation in Malawi is a result of both monetary and supply-side factors.

“Monetary supply growth drives inflation with lags of about three to six months. On the other hand, exchange rate adjustments play a relatively more significant role in fuelling cost-push inflation. It is further observed that slumps in production generate inflationary pressures,” says the study.

The study has highlighted the importance of closely coordinating monetary and exchange rate policies. It says RBM should ensure that broad money supply expands in line with nominal gross domestic product.

“However, monetary policy alone might not address other exogenous structural shocks considered as additional causes of inflation. What monetary policy can do is to slow down the rate of inflation expectations, by ensuring that prices in other categories of non-food items slow down.

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