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.
Keywords: Monetary policy, structural VARs, monetary transmission