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Towards Inflation Targeting in Sri Lanka

Author

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  • Ding Ding
  • Rahul Anand
  • Shanaka J Peiris

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.

Suggested Citation

  • Ding Ding & Rahul Anand & Shanaka J Peiris, 2011. "Towards Inflation Targeting in Sri Lanka," IMF Working Papers 11/81, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:11/81
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    References listed on IDEAS

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    1. Calvo, Guillermo A. & Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Targeting the real exchange rate: theory and evidence," Journal of Development Economics, Elsevier, vol. 47(1), pages 97-133, June.
    2. Michel Juillard, 2001. "DYNARE: A program for the simulation of rational expectation models," Computing in Economics and Finance 2001 213, Society for Computational Economics.
    3. Bauwens, Luc & Lubrano, Michel & Richard, Jean-Francois, 2000. "Bayesian Inference in Dynamic Econometric Models," OUP Catalogue, Oxford University Press, number 9780198773139.
    4. Carare, Alina & Stone, Mark R., 2006. "Inflation targeting regimes," European Economic Review, Elsevier, vol. 50(5), pages 1297-1315, July.
    5. Mark 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.
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    Cited by:

    1. Ding Ding & John Nelmes & Roshan Perera & Volodymyr Tulin, 2014. "Estimating Sri Lanka’s Potential Output," IMF Working Papers 14/40, International Monetary Fund.
    2. Anwar, Sarah. & Islam, Iyanatul., 2011. "Should developing countries target low, single digit inflation to promote growth and employment," ILO Working Papers 994642503402676, International Labour Organization.
    3. Bhattacharya, Rudrani & Patnaik,Ila, 2014. "Monetary policy analysis in an inflation targeting framework in emerging economies: The case of India," Working Papers 14/131, National Institute of Public Finance and Policy.
    4. Navoda Edirisinghe & Selliah Sivarajasingham & John Nigel, 2015. "An Empirical Study of the Fisher Effect and the Dynamic Relationship between Inflation and Interest Rate in Sri Lanka," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 5(1), pages 47-62, January.
    5. Alice Y. Ouyang & Ramkishen S. Rajan, 2016. "Does Inflation Targeting in Asia Reduce Exchange Rate Volatility?," International Economic Journal, Taylor & Francis Journals, vol. 30(2), pages 294-311, June.

    More about this item

    Keywords

    Sri Lanka; Inflation targeting; Monetary policy; Bayesian Estimation; inflation; central bank; foreign exchange; Money and Interest Rates: Forecasting and Simulation;

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