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Towards Inflation Targeting in Sri Lanka

Author

Listed:
  • 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. 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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