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Toward Inflation Targeting in Sri Lanka

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  • Ding Ding
  • Rahul Anand
  • Shanaka J. Peiris
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    Abstract

    This paper develops a practical model-based forecasting and policy analysis system (FPAS) to support a transition to an inflation forecast targeting regime in Sri Lanka. The FPAS model provides a relatively good forecast for inflation and a framework to evaluate policy trade-offs. The model simulations suggest that an open-economy inflation targeting rule can reduce macroeconomic volatility and anchor inflationary expectations given the size and type of shocks faced by the economy. Sri Lanka could aim to target a broad inflation range initially due to its susceptibility supply-side shocks while enhancing exchange rate flexibility and strengthening the effectiveness of monetary policy in the transition to an inflation forecast targeting regime.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/81.

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    Length: 28
    Date of creation: 01 Apr 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/81

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    Related research

    Keywords: Inflation targeting; Forecasting models; inflation; monetary policy; central bank; foreign exchange; money stock; real interest rate; monetary fund; real money; inflation target; monetary aggregates; monetary transmission; money market; monetary transmission mechanism; monetary targeting; aggregate demand; nominal interest rate; open market operations; price inflation; monetary aggregate; monetary policy rules; inflationary expectations; inflation rate; inflation-targeting; monetary management; government securities; monetary policy framework; money balances; monetary economics; price stability; monetary policy implementation; inflation targeting framework; rational expectations; monetary growth; money supply; financial stability; inflation equation; monetary policy rule; monetary policy transmission mechanism; rate of inflation; monetary indicators; real ? money; inflation dynamics; official reserves; price level; monetary policy instruments; monetary program; inflation process; real variables; macroeconomic stability; monetary target; money market interest rate; monetary framework; monetary policy reaction functions; monetary stance; monetary authorities; money markets; liquidity management; optimal monetary policy; transmission of monetary policy; contractionary monetary policy; measure of inflation; monetary sector;

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    1. Bauwens, Luc & Lubrano, Michel & Richard, Jean-Francois, 2000. "Bayesian Inference in Dynamic Econometric Models," OUP Catalogue, Oxford University Press, number 9780198773139.
    2. Marc Zelmer & Andrea Schaechter & Mark R. Stone & Alina Carare, 2002. "Establishing Initial Conditions in Support of Inflation Targeting," IMF Working Papers 02/102, International Monetary Fund.
    3. Michel Juillard, 2001. "DYNARE: A program for the simulation of rational expectation models," Computing in Economics and Finance 2001 213, Society for Computational Economics.
    4. Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "Targeting the real exchange rate: Theory and evidence," MPRA Paper 13412, University Library of Munich, Germany.
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