**4.1 Estimation results**

The short-run analysis results in **Table 3** reveal that all the variables, except import prices, have a significant impact on inflation in the short-run. Money supply growth and fiscal deficits are found to have a significant negative impact on inflation, contrary to what the theoretical literature stipulates. However, this could be due to the tight monetary policy being exercised by monetary authorities in Malawi,


fiscal deficit appear to have a positive and statistically significant impact on inflation in the long-run. Money supply growth and lending rate are found to have a positive and statistically significant impact at below 1% level of significance, whereas fiscal deficits are found to be significant at 10% level. To some extent signifying the negative effects of increased fiscal deficits due to the weakening of the country's fiscal consolidation efforts in the long run and also the impact of county's spending on its early 2019 elections. Output gap is found to have a negative and significant impact on inflation at below 1% level of significance, which conforms to the existing theoretical literature. The chapter further examines whether there has been any change with regards to what has been driving inflation before and after the exchange rate regime change in 2012. The study again uses the same ARDL model framework based on Eq. (2) applied over the two separate periods, 2001–2011 and 2012–2019. The short-run results covering the period 2001–2011 (the period before the regime change), show that money growth, lending rate, fiscal deficit, output and import price had an instantaneous positive impact on inflation over the first few months, before rebounding and absorbing the shock soon after, especially through increases in output and money growth. On the other hand, fiscal deficits and import prices had an instantaneous negative impact on inflation before exerting inflationary pressures soon after the first quarter. While nominal exchange rate had a significant negative impact on inflation, to some extent reflecting the impact of price controls as they

**Variable Coefficient Std. error P-value** Δ*m*2*<sup>t</sup>* 0.473708 0.170419 0.0079 Δ*it* 0.319709 0.127466 0.0157

) 0.000172 0.000104 0.1038 Δ*et* 0.013703 0.019788 0.4921 Δ*mt* 0.374323 2.060464 0.8566 Δ*yt* 0.000771 0.000241 0.0025 *c* 2.438828 1.025090 0.0216

Δ*fdt*

**Table 4.**

**261**

The long-run estimation results show that between 2001 and 2011 money supply growth exerted significant inflationary pressures in the Malawian economy, while import prices had had a negative and significant impact on inflation as monetary authorities operated a de facto pegged exchange rate regime over the period (see **Table A1** in the Appendix).<sup>4</sup> This result to some extent could be attributed to the capital management and price controls operated before 2012 by monetary authorities (see [1] for more details). However, the exchange rate is found to have a positive but insignificant impact on inflation, while output gap has a negative but

After floating the exchange rate and implementing the oil price automatic adjustment mechanism covering the period 2012–2019, the short-run estimation

<sup>4</sup> Though not reported, kindly not that the model estimation methodology followed all the necessary

weakened its impact in the short-run over the period.

Breusch-Godfrey serial correlation LM test: 0.226575 (0.7982)

Heteroskedasticity test: ARCH: 1.439651 (0.2345)

*Will Malawi's Inflation Continue Declining? DOI: http://dx.doi.org/10.5772/intechopen.91764*

*Note: Values in parentheses are P-values.*

*Long run ARDL estimation results.*

insignificant impact on inflation in the long-run.

analytical and evaluation tests assessing its suitability for analysis.

#### **Table 3.**

*Short-run ARDL error correction regression results.*

signified by the decline in average monthly growth of money supply from 2.3% over 2001–2011 to 1.6% over the period 2012–2019, and the fiscal consolidation efforts exacerbated by the withdrawal of donor funding. In line with the findings of Mangani [8] and Chavula [5], the results from this study indicate that the quantity theory of money to some extent does not seem to hold in Malawi, as the rising money supply seem to lead to a decline in consumer prices. Further analysis of the relationship between money supply growth and inflation rate shown that since 2000 the growth in money supply has persistently been lower than growth in overall inflation, averaging 3.8% and 15.5%, respectively over the period 2015Q1– 2019Q2 to some extent contributing to the forces dragging down inflation over the period. While fiscal deficits have had very minimal but significant impact on inflation over the period, with a positive impact in the first quarter before turning to having a negative impact in the second quarter. With the fiscal consolidation efforts being put in place, the time lag in affecting inflation could be suggesting that the funds have been directed towards some productive sectors which could have had a negative impact on inflation over the period. However, lending rates and exchange rates seem to be the main factors exerting positive inflationary pressures in the Malawian economy in the short run, while output initially exerts a negative impact before having a positive impact on inflation after a certain period conforming to economic theory.

**Table 4** presents results of the long-run coefficients computed from the dynamic model shown above. The findings reveal that money supply growth, lending rate and
