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Monetary policy transmission in Sri Lanka

Author

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  • Muhammadu Theseem Musthafa
  • Thanh Le
  • Sandy Suardi

Abstract

Sri Lanka’s monetary policy has evolved differently during and after a three-decade-long ethnic conflict. This paper empirically investigates effects of monetary policy shocks on Sri Lankan economy with particular focus on the strength of credit and exchange rate channels using a VAR model for 2003–2019 period. We find that: (i) monetary policy shocks have a significant and persistent impact on key macroeconomic variables even though several puzzling results emerge; (ii) the effects of monetary policy shocks are significant and more persistent in the post-conflict period than in the conflict period; (iii) a tight monetary policy effectively contains inflation in the post-conflict period; and (iv) interest rate and exchange rate channels play a dominant role while the credit channel responds with some lags in the post-conflict period.

Suggested Citation

  • Muhammadu Theseem Musthafa & Thanh Le & Sandy Suardi, 2024. "Monetary policy transmission in Sri Lanka," Applied Economics, Taylor & Francis Journals, vol. 56(2), pages 151-168, January.
    • Handle: RePEc:taf:applec:v:56:y:2024:i:2:p:151-168
    DOI: 10.1080/00036846.2023.2166671
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