Fiscal and Monetary Policy Interaction in Malawi

In this paper, the interaction between fiscal and monetary policies in Malawi is analyzed in a structural VAR framework employing sign restrictions. The key question addressed is whether macroeconomic policy environment in Malawi is characterized by fiscal dominance or monetary dominance. The model that we derive is used to identify government spending shocks, government revenue shocks, and monetary policy shocks so as to observe their respective effects on the conduct of fiscal and monetary policy. The results show that policy making in Malawi leans towards a monetary dominant regime rather than a fiscal dominant one. This is manifested by a counteractive reaction of monetary policy to loose fiscal policy on one hand and a cooperative reaction of fiscal policy to tight monetary policy stance on the other hand. The results also show that spending shocks are not financed by tax revenues which, coupled with the non-cooperative nature of monetary policy, is consistent the high public debt accumulation observed in the data.JEL Classification Codes: E52, E58, E62http://www.grips.ac.jp/list/jp/facultyinfo/leon_gonzalez_roberto