Evidence on the transmission mechanism of monetary policy is quite non-uniform, particularly
across countries with different economic structures. Complications to theoretical propositions tend to
arise when economies are less market-oriented and less sensitive to policy interventions, when
monetary authorities are not adequately independent, or when market-based and administrative policy
instruments are used concurrently. It is important, therefore, to appreciate the unique dynamics of the
transmission mechanism in any jurisdiction, in order to understand and possibly predict the
macroeconomic effects of monetary policy. This study assessed the effects of monetary policy in
Malawi by tracing the channels of its transmission mechanism, while recognising several factors that
characterise the economy: market imperfections, fiscal dominance and vulnerability to external
shocks. Within the environment of vector autoregressive modelling, Granger-causality and block
exogeneity tests as well as innovation accounting analyses were conducted, in order to describe the
dynamic interrelationships among monetary policy, financial variables and prices. The study
established the lack of unequivocal evidence in support of a conventional channel of the monetary
policy transmission mechanism, and found that the exchange rate was the most important variable in
predicting prices. Therefore, the study recommends that authorities should be more concerned with imported
cost-push inflation rather than demand-pull inflation. In the short-term, pursuing a prudent exchange rate policy
that recognises the country’s precarious foreign reserve position could be critical in deepening domestic price
stability. Beyond the short-term, price stability could be sustained through the implementation of policies
directed towards building a strong foreign exchange reserve base, as well as developing a sustainable approach
to the country’s reliance on development assistance.