Abstract

Thomas Munthali, Kisu Simwaka and MacDonald Mwale

This study focuses on the impact of real exchange rate on savings rate and economic growth. It further explores the savings transmission mechanism through which such a link can take place in the country. The results show that real effective exchange rate (REER) volatility has adverse effects on economic performance. Contextually, an appreciated REER is significantly and positively correlated with economic growth, reflecting Malawi’s net-importer position. On the other hand, REER volatility is significantly and negatively correlated with growth, reflecting investors’ preference for a stable exchange rate. With regard to savings, the study finds that appreciation of the REER (or nominal exchange rate) would encourage savings. The study also finds that devaluation of the REER has an insignificant effect on economic growth in the long-run. The negative impact of real exchange rate volatility on economic growth suggests that eliminating real exchange rate volatility can have strong growth-enhancing effects. Government has a variety of instruments at their disposal to influence the level, and reduce the volatility of the real exchange rate. The options include currency intervention (building up foreign exchange reserves) and eliminating institutional and market failures.