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Background
The 1970s and 1980s distortion of regulation coupled with the oil price shocks and escalating real interest for external debt servicing worsened the macroeconomic performance of many developing countries. Accordingly, a mix of economic measures under the Structural Adjustment Program (SAP) supported by the International Monetary Fund (IMF) and the World Bank designed to achieve internal and external balances at the minimum cost were adopted. Among many policy measures, SAP included macroeconomic reforms aimed at developing a well-functioning financial system that would contribute favourably to economic growth and price stability. Based on MacKinnon (1973) and Shaw (1973) paradigm, reforming the financial sector would encourage mobilization of savings and in turn increase investment and hence economic growth through their effect on availability and allocation of credit.
Macroeconomic reforms, particularly in the financial sector in Malawi included reform measures on interest rates, exchange rate, monetary policies, financial institutions and opening of the current and capital account. The reform measures summarised from Chirwa and Mlachila (2004) paper are highlighted in Table 1 and were introduced and implemented at different time period between 1987 and 1998. Hence, this study follows Aron and Muellbauer (2000), defining financial reform as a complete set of these reform measures that were implemented to improve financial intermediation between savers and investors in Malawi. The paper on Aron and Muellbauer (2000) constructed a financial reform index using a linear spline function with the process of accommodating the sequential institutional changes that occur due to different changes in the financial sector policy reforms.1 It is argued that single indicators of financial reforms are not a comprehensive representation of financial sector development and do not consider institutional changes arising from implementing reform measures at different time period. In addition, the use of dummy numbers to represent financial reforms is mostly subjective and difficult in assigning arbitrary dummies (Groenewold, Peng, Li and Fan, 2008).
The effects of financial reforms on macroeconomic activities has been extensively studied in less developing countries but existing research has concentrated on the traditional way of testing the effects of financial reforms on macroeconomic variables such as savings, credit, investment and economic growth (Levine 2005). Very few if any especially in less developed countries have studied on the effects of these reforms on aggregate consumption which forms a large component of gross domestic product (GDP). Specifically, this work focuses on the effects of reforms on consumption behaviour which is lacking in most studies in less developed countries. In addition, the distinct feature of most less developed countries is the high degree of dependence on foreign aid (Hansen and Heady, 2009) and has become pronounced during the financial reform period. In addition, research on less developed countries has focussed on investigating the traditional way of monetary policy transmission mechanism as surveyed recently by Mishra and Montiel (2012). It is revealed that there is limited focus on the issue of how changes in the conduct of monetary policy affect macroeconomic performance following financial reforms.
Chapter1: Introduction
1.1. Introduction
1.2. Background
1.3. Problem Statement and Motivation
1.4. Studies on Macroeconomic Reforms in Malawi
1.5. Objective of the Thesis
1.6. Contribution of the Thesis.
1.7. Scope and Outline of the Thesis
Chapter 2: Financial Reforms and Consumption Behaviour in Malawi
2.1 Introduction
2.2 Brief Overview of Financial Liberalisation in Malawi
2.3 Empirical Specification of the Model .
2.4 Data and Description Statistics .
2.5 Empirical Analysis
2.6 Conclusion
Chapter 3: Evolution of Monetary Policy Transmission Mechanism in Malawi: A TVP-VAR Approach
3.1 Introduction
3.2 Brief Overview of Monetary Policy and Stylized Facts in Malawi
3.3 Econometric Methodology
3.4 Data
3.5 Empirical Results
5.6 Conclusion .
5.7 Appendix
Chapter 4: Monetary Policy Response to Foreign Aid in an Estimated DSGE Model of Malawi
4.1 Introduction
4.2 Macroeconomic Development and Foreign Aid in Malawi
4.3 The Model
4.4 Calibration and Estimation of the Model
4.5 Monetary Policy Response Options
4.6 Sensitivity Analysis
4.7 Conclusion
4.8 Appendix .
Chapter 5: Conclusion
