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Determining the output gap and it��?s link with price dyn | 17671
International Research Journals

Determining the output gap and it��?s link with price dynamics in Malawi

Abstract

Mark Lungu, Wytone Jombo, Austin Chiumia

The objective of this study was to determine the level of output gap for the Malawi economy and link it to inflation dynamics. This was against the background that the link between money supply growth and inflation as portrayed by the quantity theory of money has been empirically proven to be broken. Given the uncertainty surrounding measurement of the output gap, this paper utilizes three of the most popular methodologies to estimate Malawi’s potential output level and output gap namely; linear time trend, the Hodrick-Prescott filter, and the structural vector autoregressive (SVAR) model. While measures of output gap employed are not identical, they nonetheless all show a weak and not robust link between business cycle developments and inflation developments. In particular, the results show there is an unpredictable link between supply side shocks and inflation developments.

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