This paper sets out to investigate the process through which monetary policy affects economic activity in Malawi. Using innovation accounting in a structural vector autoregressive model, it is established that monetary authorities in Malawi employ hybrid operating procedures and pursue both price stability and high growth and employment objectives. Two operating targets of monetary policy are identified, viz., bank rate and reserve money, and it is demonstrated that the former is a more effective measure of monetary policy than the latter. The study also illustrates that bank lending, exchange rates and aggregate money supply contain important additional information in the transmission process of monetary policy shocks in Malawi. Furthermore, it is shown that the floatation of the Malawi Kwacha in February 1994 had considerable effects on the country's monetary transmission process. In the post-1994 period, the role of exchange rates became more conspicuous than before although its impact was weakened, and the importance of aggregate money supply and bank lending in transmitting monetary policy impulses was enhanced. Overall, the monetary transmission process evolved from a weak, blurred process to a somewhat strong, less ambiguous mechanism.

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The purpose of this paper is two-fold: first, we propose a method for checking empirically whether inflation expectations are anchored in the long run, and at what level. The extent of anchoring then serves as a proxy for the credibility of the monetary authority. Second, to assess how well this measure proxies credibility, we cross-check it against periods for which the level of credibility is known and generally agreed upon. To this end, we apply our measure to the US inflation history since 1963, which includes both the period of the Great Inflation, in which credibility was poor and deteriorating, as well as the period of the Great Moderation during which credibility in the monetary authority was gradually re-established. Finally we check what our measure of credibility tells us about the crisis period.

provides economic analysis and policy advice with the aim of promoting sustainable and equitable development. The Institute began operations in 1985 in Helsinki, Finland, as the first research and training centre of the United Nations University. Today it is a unique blend of think tank, research institute, and UN agency-providing a range of services from policy advice to governments as well as freely available original research. UNU-WIDER acknowledges specific programme contribution from the National Treasury of South Africa to its project 'Regional Growth and Development in Southern Africa' and core financial support to its work programme from the governments of Denmark, Finland, Sweden, and the United Kingdom.

In a world characterized by noisy information and conflicting signals, no central bank is able to affect private-sector expectations at all times. In order to evaluate the effectiveness of any central bank communication strategy, it is important to know what private agents rely on when they form expectations. We model monetary policy as an information game in which individuals form their expectations based on all the information that is available to them (public and private) and are, therefore, subject to the noise that characterizes that information. Individual agents also know that inflation is ultimately affected both by central bank policies and by the average expectation formed by all agents. The way individuals interpret these two components to form their expectations is explained in the context of a higher-order expectations setup and is central to our argument. We then apply Bacharach's (1993) variable-universe methodology to provide a framework for assessing everyone's interpretations. Therefore, our contribution is, first, to describe monetary policy as an information game in which interpretations matter and, second, to provide a way of solving for these interpretations. We show that a monetary policy regime that has explicit quantitative objectives may provide individuals with better anchors for coordinating their expectations. However, that is only true either if no great shocks are anticipated or if all other public information is very unclear, leaving the inflation target as the only clear piece of information available. We derive the conditions under which this is true.

We analyze how the provision of an explicit numerical inflation target provides a focal point for agents' expectations when information is imperfect. Communicating a target and a tolerance band around it provides a clear framework with which to evaluate monetary policy outcomes. We show how inflation targeting exploits the self-reinforcing loop between success and credibility to help the Central Bank endure large and long lasting shocks. Last, we derive the optimal band width around the target, which exploits the benefits of providing a focal point while maximizing the probability of success.

The primary objective of this paper is to investigate the interaction of formal and informal …nancial markets and their impact on economic activity in quasi-emerging market economies (QEMEs). Using a four-sector dynamic stochastic general equilibrium (DSGE) model, we demonstrate that formal and informal …nancial sector loans are complementary in the aggregate, suggesting that an increase in the use of formal …nancial sector (FFS) credit creates additional productive capacity that requires more informal …nancial sector (IFS) credit to maintain equilibrium. Our model also demonstrates that the response of FFS loans to a positive production technology shock is sensitive to the rate of success for high risk borrowers while the response of IFS loans is not. We further show that interest rates in the IFS may not necessarily be driven by FFS interest rates, with the implication that the impact of monetary policy on economic activity may partly be o¤set by IFS interest rates.

This paper aims at empirically investigating the role of moral hazard in the e¢ ctivity of deposit insurance in achieving banking stability. If the negative e¤ect of deposit insurance on banking stability is through moral hazard, then deposit insurance will be associated with banking insolvency and credit crunch more than with bank runs. To test this hypothesis, we compute measures of these two types of banking instability. We …nd that deposit insurance per se has no signi…cant e¤ect either on bank insolvency and credit crunch or on bank runs. However, when the deposit insurance is coupled with an increase in credit to private sector, it has a positive and signi…cant e¤ect on bank insolvency and credit crunch but not on bank runs.