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Assessing monetary policy targeting regimes for small open economies

Author

Listed:
  • Harsha Paranavithana
  • Leandro Magnusson
  • Rod Tyers

Abstract

This paper quantifies the performance of five monetary policy regimes in controlling macroeconomic volatility triggered by a variety of supply, demand and external shocks in small open economies. While the proposed macroeconomic model is generic, the application is to the case of Sri Lanka. The investigated regimes separately target the exchange rate, a monetary aggregate, nominal GDP, the CPI inflation rate and a Taylor composite of output gaps and inflation. The results suggest that inflation targeting offers the least macro-economic volatility overall. Consistent with earlier research and Mundell’s financial trilemma, its stabilising power is greatest under demand and external shocks, which have grown more prominent as product and financial markets have opened.

Suggested Citation

  • Harsha Paranavithana & Leandro Magnusson & Rod Tyers, 2018. "Assessing monetary policy targeting regimes for small open economies," CAMA Working Papers 2018-33, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2018-33
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2018-07/33_2018_paranavithana_magnusson_tyers.pdf
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    Cited by:

    1. Harsha Paranavithana & Leandro Magnusson & Rod Tyers, 2021. "Monetary Policy Regimes in Small Open Economies: The Case of Sri Lanka," Asian Economic Journal, East Asian Economic Association, vol. 35(4), pages 434-462, December.

    More about this item

    Keywords

    Macroeconomic volatility; Monetary policy; Mundell’s trilemma; Sri Lanka;
    All these keywords.

    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • N15 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Asia including Middle East

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