An econometric model of the Malawian economy

This paper has estimated a small-open economy macroeconomic model for Malawi. The structure of the model consists of production, expenditure, government, monetary, employment sectors and prices. The estimated parameters of the long run version of the model were used to perform simulation experiments to determine the model's tracking performance of the historical data and to assess the effects of changes in selected exogenous variables on key macroeconomic variables. The dynamic simulation results indicate that a sustained devaluation of the Malawi kwacha improves the real trade balance, but leads to higher inflation and reduces real GDP growth. Bond-financed increases in government consumption expenditures are less inflationary, lead to higher real GDP growth, but worsen the real trade balance position. The short run version of the model was estimated using the cointegration estimation technique.