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Revisiting monetary policy transmission in a new inflation targeting country

Author

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  • Garg, Bhavesh
  • Shah, Sayar Ahmad
  • Edirisinghe, Janaka

Abstract

We investigate the monetary policy transmission mechanism in Sri Lanka, which is gradually transitioning towards a flexible inflation targeting framework and has adopted this approach on a de facto basis. Using monthly data from 2020 to 2023, the findings highlight the interest rate channel as playing a more significant role than the exchange rate channel in transmitting the policy interventions to the final output. Key results suggest that under a strict inflation targeting regime, monetary transmission is more potent compared to a flexible inflation targeting framework. Therefore, to enhance monetary policy effectiveness, Sri Lanka should focus on the robust implementation of an inflation-targeting regime.

Suggested Citation

  • Garg, Bhavesh & Shah, Sayar Ahmad & Edirisinghe, Janaka, 2025. "Revisiting monetary policy transmission in a new inflation targeting country," Journal of Asian Economics, Elsevier, vol. 100(C).
    • Handle: RePEc:eee:asieco:v:100:y:2025:i:c:s1049007825001502
    DOI: 10.1016/j.asieco.2025.102026
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    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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