Abstract

Monetary policies are pivotal in influencing income inequality within a country, with the potential to either exacerbate or alleviate economic disparities. A review of literature in Malawi and sub-Saharan countries shows that there needs to be more literature on the subject matter to formulate substantive policies to move a large percentage of the population from poverty. The study’s primary objective was to investigate the impact of monetary policy on income distribution in Malawi. This study used time series data from 1990-2022. Using the Ordinary Least Squares (OLS), Vector Autoregressive (VAR) estimation techniques, and Impulse Response Functions (IRFs) generated from the VAR model to analyse the dynamic impact of monetary policy on income inequality in Malawi, the study finds that Real effective exchange rate significantly affects income inequality in Malawi. On average, a one Standard Deviation shock to the Real effective exchange rate increases income inequality until the sixth period of the shock. Economic growth increases income inequality, but with minimal impact. The study also finds that one positive innovation shock in the Inflation rate increases income inequality. Conversely, a shock to the real interest rate negatively affects income inequality. Real interest rates bring change in the Gini coefficient as there are traceable short-run to long-run effects of a 1-6year period. The study recommends that the government may consider the exchange rates as a policy indicator in guiding domestic and foreign claims for goods and services, and income distribution in the country. The consideration may take the form of seasonal exchange rate policies to regulate the demand for foreign goods and the pricing of domestic goods. The government may also consider intensifying social safety net programs, labor training, and recruitment policies to curb the income inequality that continues dividing the nation into different economic spectrums. More importantly, the government should regulate the real interest rates through interest rate capping to control the worsening economic gap.

More details

School	: School of Law, Economics and Government
Issued Date	: 2024

Download full document