The degree of capital mobility has been widely recognized to be an important element in determining the effects of stabilization policies, yet it is seldomly estimated in developing countries. Financial repression considered widespread in developing countries is mostly given as an explanation for the lack of empirical research on the subject.
Historically, the investigation of international mobility of capital have studied rates of return on similar assets dominated in different currencies. In recent times, efforts have been directed at ascertaining the degree of international capital mobility by examining the relationship between domestic saving and investment rates. According to the first approach, the mobility of groups of financial assets, which represent the existing capital stock, is assessed while the latter approach tests for the mobility of the flow of new capital which is reflected in much smaller net flows of capital into or out of an economy.
This study, on similar terms with the first approach, employs the technique developed for measuring capital mobility in financially-repressed economies by Haque and Montiel (1990) and also uses the second approach initiated by Feldstein and Horioka (1980) for the Malawian economy. Besides, this study employs time series analysis for the sample period 197801 to 1991Q4 and reveals that there is considerable degree of capital mobility in Malawi, though further analysis has to be done. Nevertheless, the results show that domestic interest rates would be subject to very minimal control by the Malawian authorities and that the government should greatly avoid exchange rate misalignment.