An Assessment of Currency Depreciation in Malawi: Simulation Results from a Macroeconometric Model

Infation has been relatively high and volatile in Malawi since the 1980s. The various attempts to stabilize inflation have only yielded temporary relief, and inflation remains the central problem for policymakers. This paper attempts to shed some light on the impact of exchange rate depreciation and changes in other key variables on inflation in Malawi by simulating the effects within a small-open economy IS-LM-AS framework. The results of the simulation experiments suggest that 10% depreciation generates about 7% inflation indicating that exchange rate has a partial pass-through effect. The results also show that nominal interest rate and wages have played a lesser important role in Malawi's inflationary process than the exchange rate.