This paper examines the relative importance of monetary factors in driving inflation in Malawi. A\r\nstylized inflation model is specified which includes standard monetary variables, the exchange rate\r\nand supply-side factors. The results indicate that inflation in Malawi is a result of both monetary and\r\nsupply-side factors. Monetary supply growth drives inflation with lags of about 3 to 6 months. On the\r\nother hand, exchange rate adjustments play a relatively more significant role in fuelling cost-push\r\ninflation. It is further observed that slumps in production generate inflationary pressures. At policy\r\nlevel, the Reserve Bank should ensure that broad money supply expands in line with nominal gross\r\ndomestic product (GDP). However, it must be emphasized that monetary policy alone might not\r\naddress other exogenous structural shocks considered as additional causes of inflation. What\r\nmonetary policy can do is to slowdown the rate of inflation expectations by ensuring that prices in\r\nother categories of non-food items slow down. For example, it has been shown that exchange rate\r\nshocks have a strong effect on inflation. Given this finding, exchange rate stability is a key to\r\nanchoring inflation expectations, as the exchange rate pass-through in Malawi is relatively high.\r\nFinally, measures to control inflation must also emphasize enhancing production and supply,\r\nespecially of food. Thus, inflationary control should aim at policies which are directed at both\r\nmonetary and supply factors.
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