Abstract

Malawi’s unrestrained over-reliance on imports continues to expose the country to vulnerabilities in price variability and foreign exchange rate volatility. Several studies have combined data from many African countries to analyse the relationship between foreign exchange and consumer price index and some studies on the subject fails to take into account the causal relationship between these two fundamental macroeconomic variables. This study goes beyond analysis of the relationship between these variables by producing a model for the interdependence between foreign exchange and consumer price index specifically in Malawi using vector auto regressive model and granger causality test. The study used time series monthly data from 2012 to 2022 to estimate the VAR model. VAR model employed shows that there is a direct relationship between foreign exchange and consumer price index in Malawi. The results shows that about 79% change in consumer price index is in response to change in foreign exchange rate. On the other hand, about 72% change in foreign exchange rate in Malawi is caused by changes in consumer price index. This interdependence is also reflected in granger causality test results which reveals that consumer price index and foreign exchange granger-cause each other. Based on this correlation, a model is developed linking foreign exchange and consumer price index in Malawi. The study recommends to policy makers to cushion the effect of inflation on the economy that arises from the exchange rate movement as it explores measures to reduce importation of domestically substitutable goods in the economy.

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School	: School of Natural and Applied Sciences
Issued Date	: 2024

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