Abstract

The study analyzed the effects of fiscal policy on the Malawian economy. This was achieved in two stages: first, an analysis was done on the effect of a change in fiscal policy variables, i.e. tax revenue or government expenditure, on output and inflation. Second, the study examined the existence of a fiscal policy transmission mechanism by assessing the impact of a change in the fiscal variables on private consumption and private investment channels. After a review of the different quantitative techniques, the study used Structural Vector Auto Regression (SVAR) model where shocks of fiscal policy variables were recovered to analyze their impact on output, inflation, private consumption and investment. The study used quarterly data covering the period 1990 to 2014. The results showed that an increase in government expenditure and government revenue leads to a positive and negative impact on output respectively. Further, government revenue and government spending were found to negatively affect inflation. In terms of the transmission mechanism, evidence was found that private consumption and private investment are channels through which fiscal policy effects pass through. Both private investment and private consumption were found to be negatively affected by an increase in government spending. Whilst a rise in government revenues was found to be negative on consumption, one result had a non-standard flavor. An increase in government revenue was found to positively affect private investment. All in all, it was observed that the method used in fiscal deficit financing remains crucial in determining economic activity in Malawi

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School	: School of Law, Economics and Government
Issued Date	: 2016

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