RBM Price Stability Mandate Impinges On Welfare Cost

A study conducted by the Reserve Bank of Malawi (RBM) to evaluate the practicability of including the exchange rate as one of the response variables in the monetary policy reaction function has established that the development has more losses than benefits.
The RBM’s monetary policy has since 2018 been guided by a version of an inflation targeting framework, which was developed with the support from the International Monetary Fund (IMF).
Under this framework, the stance of monetary policy is determined by the inflation outlook represented by the inflation forecast.
However, given the prevalence of the effects of foreign shocks continuously hitting Malawi, there have been calls to review the design of the monetary policy and consider the one which incorporates the exchange rate as one of the response variables in the monetary policy reaction function.
But the study, done by Kisu Simwaka, Mtendere Chikonda and Takondwa Banda of RBM titled ‘Impact of monetary policy reaction to exchange rate misalignment in the presence of foreign shocks: The case of Malawi’ noted the regime would affect welfare of Malawians.
According to the study, while this regime could be suitable for attainment of exchange rate stability, it will come at the expense of unfavourable performance on the RBM’s price stability mandate, in addition to welfare cost.
Reads the study in part: “The properties of this indicate that the regime with exchange rate stabilisation promotes exchange rate stability