The Central Bank of Sri Lanka introduced a system of active Open Market Operations (OMO) on 03 March 2003 in order to manage liquidity at its own discretion and thereby to achieve monetary policy targets. Under this system, monetary policy operations are conducted to achieve a path of reserve money targets, while maintaining short term interest rates stable around a level, which is consistent with the reserve money targets. This paper reviews the experience under the system during March 2003- June 2005 and presents suggestions, on the basis of the review, for improving the effectiveness of monetary policy operations in achieving their objectives. The paper highlights the need for focusing on overnight interest rates, instead of reserve money, as the operating target, determining the size of daily operations under OMO entirely on the basis of their outcome on interest rates and introducing long term repurchase transactions and auctions for multiple maturities for managing liquidity on a long term basis. (JEL E44, E52) DOI: 10.4038/ss.v36i1.1229 Staff Studies Volume 36 Numbers 1& 2 2006 p.15-35
{"title":"Active Open Market Operations: A Review of Experience","authors":"D. Wijesinghe","doi":"10.4038/SS.V36I1.1229","DOIUrl":"https://doi.org/10.4038/SS.V36I1.1229","url":null,"abstract":"The Central Bank of Sri Lanka introduced a system of active Open Market Operations (OMO) on 03 March 2003 in order to manage liquidity at its own discretion and thereby to achieve monetary policy targets. Under this system, monetary policy operations are conducted to achieve a path of reserve money targets, while maintaining short term interest rates stable around a level, which is consistent with the reserve money targets. This paper reviews the experience under the system during March 2003- June 2005 and presents suggestions, on the basis of the review, for improving the effectiveness of monetary policy operations in achieving their objectives. The paper highlights the need for focusing on overnight interest rates, instead of reserve money, as the operating target, determining the size of daily operations under OMO entirely on the basis of their outcome on interest rates and introducing long term repurchase transactions and auctions for multiple maturities for managing liquidity on a long term basis. (JEL E44, E52) DOI: 10.4038/ss.v36i1.1229 Staff Studies Volume 36 Numbers 1& 2 2006 p.15-35","PeriodicalId":362386,"journal":{"name":"Staff Studies","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130334978","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the effectiveness of exchange rate policy of Sri Lanka in achieving external competitiveness since liberalization of the economy in 1977. The conventional two-country trade model that explains the traditional approach to Balance of Payment (BOP) was applied using quarterly data covering the period of 1978:1 to 2000:4. Results reveal that the Real Effective Exchange Rate(REER) does not have significant impact on improving the Trade Balance (TB) particularly in the short run implying a blurred J-Curve phenomenon. Even though the cointegration tests reveal that there is a long run relationship between TB and the REER it shows very marginal impact in improving TB in long run. (JEL F40, O24) DOI: 10.4038/ss.v35i1.1234 Staff Studies Volume 35 Numbers 1& 2 2005 p.63-91
{"title":"Exchange Rate, Competitiveness and Balance of Payment Performance","authors":"Up Alawattage","doi":"10.4038/SS.V35I1.1234","DOIUrl":"https://doi.org/10.4038/SS.V35I1.1234","url":null,"abstract":"This paper examines the effectiveness of exchange rate policy of Sri Lanka in achieving external competitiveness since liberalization of the economy in 1977. The conventional two-country trade model that explains the traditional approach to Balance of Payment (BOP) was applied using quarterly data covering the period of 1978:1 to 2000:4. Results reveal that the Real Effective Exchange Rate(REER) does not have significant impact on improving the Trade Balance (TB) particularly in the short run implying a blurred J-Curve phenomenon. Even though the cointegration tests reveal that there is a long run relationship between TB and the REER it shows very marginal impact in improving TB in long run. (JEL F40, O24) DOI: 10.4038/ss.v35i1.1234 Staff Studies Volume 35 Numbers 1& 2 2005 p.63-91","PeriodicalId":362386,"journal":{"name":"Staff Studies","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114214272","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Since 1980 Money Brokers (MBs) have been operating in Sri Lanka as key players in the inter bank call money market, government securities market and foreign exchange market. Money broking firms start operation after obtaining a ‘no objection' letter from the Central Bank of Sri Lanka (CBSL). Currently, neither the CBSL nor any other regulatory authority regulate or supervise these institutions. Therefore, this paper intends to examine regulatory practices of money broking companies in selected countries with the view of assessing the need for and the scope of regulating money broking firms in Sri Lanka. This study is based on the information collected from 21 Central Banks/Monitory Authorities in various countries of the world, where responses were obtained through an e-mail survey conducted in late 2004. The study clearly indicates that whenever, the firms are only involved in traditional money broking activities i.e., act as an agent between lender and borrower for a commission, authorities do not regulate or supervise their activities mainly because they do not hold public funds and therefore, no systemic risk is involved. However, majority of the countries in the sample issue license or other form of approval mainly for maintaining the professional standards and monitoring the developments in this sector. In many countries, self regulatory organizations hold the responsibility of supervising and regulating money broking activities. The paper concludes that the money broking industry in Sri Lanka too needs to develop a self regulatory framework to persuade firms to maintain self discipline within the industry preferably through the existing Money Brokers Association and that the Association should endeavour to enhance its reputation by introducing quality services and practice to its members and to the market and eventually achieve the recognition of the authorities. (JEL G28) DOI: 10.4038/ss.v37i1.1225 Staff Studies Volume 37 Numbers 1& 2 2007 p.19-48
{"title":"Regulatory Practices of Money Broking Business in Selected Countries","authors":"Rupa Dheerasinghe","doi":"10.4038/SS.V37I1.1225","DOIUrl":"https://doi.org/10.4038/SS.V37I1.1225","url":null,"abstract":"Since 1980 Money Brokers (MBs) have been operating in Sri Lanka as key players in the inter bank call money market, government securities market and foreign exchange market. Money broking firms start operation after obtaining a ‘no objection' letter from the Central Bank of Sri Lanka (CBSL). Currently, neither the CBSL nor any other regulatory authority regulate or supervise these institutions. Therefore, this paper intends to examine regulatory practices of money broking companies in selected countries with the view of assessing the need for and the scope of regulating money broking firms in Sri Lanka. This study is based on the information collected from 21 Central Banks/Monitory Authorities in various countries of the world, where responses were obtained through an e-mail survey conducted in late 2004. The study clearly indicates that whenever, the firms are only involved in traditional money broking activities i.e., act as an agent between lender and borrower for a commission, authorities do not regulate or supervise their activities mainly because they do not hold public funds and therefore, no systemic risk is involved. However, majority of the countries in the sample issue license or other form of approval mainly for maintaining the professional standards and monitoring the developments in this sector. In many countries, self regulatory organizations hold the responsibility of supervising and regulating money broking activities. The paper concludes that the money broking industry in Sri Lanka too needs to develop a self regulatory framework to persuade firms to maintain self discipline within the industry preferably through the existing Money Brokers Association and that the Association should endeavour to enhance its reputation by introducing quality services and practice to its members and to the market and eventually achieve the recognition of the authorities. (JEL G28) DOI: 10.4038/ss.v37i1.1225 Staff Studies Volume 37 Numbers 1& 2 2007 p.19-48","PeriodicalId":362386,"journal":{"name":"Staff Studies","volume":"37 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129683031","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Communication policies are important for central banks for two reasons. First, being public institutions it is important to disclose their actions to the general public for maintaining democratic accountability that comes with independence. Second, the policy effectiveness is enhanced if the general public is aware of policies of central banks, and reasons. Realising this, the Central Bank of Sri Lanka is in the process of developing a comprehensive communication policy to portray its accountability and to allow economic agents to make informed judgements about performance of the economy and Central Bank policies. However, there are several issues to be addressed in Sri Lanka before any communication policy takes its intended full effect. (JEL D83, E58) DOI: 10.4038/ss.v36i1.1228 Staff Studies Volume 36 Numbers 1& 2 2006 p.1-14
{"title":"Communication Policy of Central Banks: The Case of Sri Lanka","authors":"H. Thenuwara","doi":"10.4038/SS.V36I1.1228","DOIUrl":"https://doi.org/10.4038/SS.V36I1.1228","url":null,"abstract":"Communication policies are important for central banks for two reasons. First, being public institutions it is important to disclose their actions to the general public for maintaining democratic accountability that comes with independence. Second, the policy effectiveness is enhanced if the general public is aware of policies of central banks, and reasons. Realising this, the Central Bank of Sri Lanka is in the process of developing a comprehensive communication policy to portray its accountability and to allow economic agents to make informed judgements about performance of the economy and Central Bank policies. However, there are several issues to be addressed in Sri Lanka before any communication policy takes its intended full effect. (JEL D83, E58) DOI: 10.4038/ss.v36i1.1228 Staff Studies Volume 36 Numbers 1& 2 2006 p.1-14","PeriodicalId":362386,"journal":{"name":"Staff Studies","volume":"42 5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125753015","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study attempts to measure the impact of changes in petroleum prices on inflation in Sri Lanka. The direct impact is measured through various components in the price indices that have a direct relationship with diesel prices. To measure the indirect impact of changes in petroleum prices on other items in consumer price indices, autoregressive distributed lag model was used. The results reveal that the indirect impact of changes in diesel prices on both Colombo Consumers' Price Index (CCPI) and Sri Lanka Consumers' Price Index (SLCPI) is much larger than the direct impact. Increase in diesel prices by 10 per cent would increase the monthly changes in CCPI by 1.21 per cent during the first month. In the case of SLCPI, the indirect impact of the same change in diesel price was 1.01 per cent with a lag of 2-3 months. Result of co-integration tests reveal that two variables are not significantly co-integrated to form a long-run permanent relationship. These results imply that permitting domestic petroleum prices to adjust gradually rather than sharp adjustments within a short period could minimise the impact of large fluctuations in international prices on domestic price levels. (JEL L97, E31 ) DOI: 10.4038/ss.v35i1.1236 Staff Studies Volume 35 Numbers 1& 2 2005 p.107-127
{"title":"The Impact of Petroleum Prices on Inflation in Sri Lanka","authors":"W. Perera","doi":"10.4038/SS.V35I1.1236","DOIUrl":"https://doi.org/10.4038/SS.V35I1.1236","url":null,"abstract":"This study attempts to measure the impact of changes in petroleum prices on inflation in Sri Lanka. The direct impact is measured through various components in the price indices that have a direct relationship with diesel prices. To measure the indirect impact of changes in petroleum prices on other items in consumer price indices, autoregressive distributed lag model was used. The results reveal that the indirect impact of changes in diesel prices on both Colombo Consumers' Price Index (CCPI) and Sri Lanka Consumers' Price Index (SLCPI) is much larger than the direct impact. Increase in diesel prices by 10 per cent would increase the monthly changes in CCPI by 1.21 per cent during the first month. In the case of SLCPI, the indirect impact of the same change in diesel price was 1.01 per cent with a lag of 2-3 months. Result of co-integration tests reveal that two variables are not significantly co-integrated to form a long-run permanent relationship. These results imply that permitting domestic petroleum prices to adjust gradually rather than sharp adjustments within a short period could minimise the impact of large fluctuations in international prices on domestic price levels. (JEL L97, E31 ) DOI: 10.4038/ss.v35i1.1236 Staff Studies Volume 35 Numbers 1& 2 2005 p.107-127","PeriodicalId":362386,"journal":{"name":"Staff Studies","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131703458","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The bond market in Sri Lanka has shown a slow but steady growth since the primary issue of Treasury Bonds that began in 1997. The Primary Dealer System that existed since 1992 provided a sound institutional framework for this growth whilst the Real Time Gross Settlement System and Scripless Securities Settlement System that came into being recently provided further impetus to the development of the bond market. With regular primary issues and secondary market trading in long-term debt, a yield curve emerged in the Treasury Bond market. The existence of a yield curve in the government bond market would encourage issuance of corporate debt as it would provide a bench mark for pricing of corporate debt. The high degree of risks involving settlement and trading in scrip securities and systemic deficiencies were minimized with the introduction of new infrastructure and efficiency in the market operations increased due to scripless trading and electronic on-line settlement in a delivery versus payment environment. With the increased competition in the market, spreads between buying and selling prices have reduced gradually. This would assist, among other things, in reducing the cost of borrowing to the Government. The large institutional investors have taken the initiative to develop their fund management skills and, with better trading skills of dealers and investors, the market will be increasingly active and even the long-term bonds will become much more liquid instruments in the market. The organizational and policy related issues, such as the delay in the formation of a public debt management office, large and widening fiscal deficit, debt sustainability and solvency issues, high proportion of short term debt, irregular cash flows, deficiencies in cash management, primitive nature of the corporate debt market and taxation on debt instruments vis-a-vis conventional sources of financing, are the key remaining issues that need to be addressed. (JEL H63, G18) DOI: 10.4038/ss.v34i1.1240 Staff Studies Volume 34 Numbers 1& 2 2004 p.69-85
{"title":"Developing a Deep and Liquid Bond Market Experience of Sri Lanka","authors":"K. Dheerasinghe","doi":"10.4038/SS.V34I1.1240","DOIUrl":"https://doi.org/10.4038/SS.V34I1.1240","url":null,"abstract":"The bond market in Sri Lanka has shown a slow but steady growth since the primary issue of Treasury Bonds that began in 1997. The Primary Dealer System that existed since 1992 provided a sound institutional framework for this growth whilst the Real Time Gross Settlement System and Scripless Securities Settlement System that came into being recently provided further impetus to the development of the bond market. With regular primary issues and secondary market trading in long-term debt, a yield curve emerged in the Treasury Bond market. The existence of a yield curve in the government bond market would encourage issuance of corporate debt as it would provide a bench mark for pricing of corporate debt. The high degree of risks involving settlement and trading in scrip securities and systemic deficiencies were minimized with the introduction of new infrastructure and efficiency in the market operations increased due to scripless trading and electronic on-line settlement in a delivery versus payment environment. With the increased competition in the market, spreads between buying and selling prices have reduced gradually. This would assist, among other things, in reducing the cost of borrowing to the Government. The large institutional investors have taken the initiative to develop their fund management skills and, with better trading skills of dealers and investors, the market will be increasingly active and even the long-term bonds will become much more liquid instruments in the market. The organizational and policy related issues, such as the delay in the formation of a public debt management office, large and widening fiscal deficit, debt sustainability and solvency issues, high proportion of short term debt, irregular cash flows, deficiencies in cash management, primitive nature of the corporate debt market and taxation on debt instruments vis-a-vis conventional sources of financing, are the key remaining issues that need to be addressed. (JEL H63, G18) DOI: 10.4038/ss.v34i1.1240 Staff Studies Volume 34 Numbers 1& 2 2004 p.69-85","PeriodicalId":362386,"journal":{"name":"Staff Studies","volume":"63 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131202390","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper investigates the long run demand for money and the short run dynamics of the long run money demand. The estimation of a money demand function for M1, using quarterly data for 1978 Q1 to 2003 Q4 forms the basis of this investigation. The findings of the study reveal that M1 is co-integrated with real income and the nominal interest rate. The study, further found that the one year term-deposit rate of commercial banks was the best fit for the model used when compared to alternative interest rates such as the 3-month Treasury bill rate, the 12- month Treasury bill rate and the repo rate, implying that the 1-year term deposit rate is the opportunity cost of holding money. We also found that M2 is not co-integrated with real income or any of the above interest rates, in nominal terms. This indicates that monetary authorities should pay close attention to the narrow definition of money when formulating monetary policy. (JEL E41, E47) DOI: 10.4038/ss.v34i1.1237 Staff Studies Volume 34 Numbers 1& 2 2004 p.1-12
{"title":"Demand for Money in Sri Lanka During the Post Liberalisation Period","authors":"W. R. A. Dharmaratne","doi":"10.4038/SS.V34I1.1237","DOIUrl":"https://doi.org/10.4038/SS.V34I1.1237","url":null,"abstract":"This paper investigates the long run demand for money and the short run dynamics of the long run money demand. The estimation of a money demand function for M1, using quarterly data for 1978 Q1 to 2003 Q4 forms the basis of this investigation. The findings of the study reveal that M1 is co-integrated with real income and the nominal interest rate. The study, further found that the one year term-deposit rate of commercial banks was the best fit for the model used when compared to alternative interest rates such as the 3-month Treasury bill rate, the 12- month Treasury bill rate and the repo rate, implying that the 1-year term deposit rate is the opportunity cost of holding money. We also found that M2 is not co-integrated with real income or any of the above interest rates, in nominal terms. This indicates that monetary authorities should pay close attention to the narrow definition of money when formulating monetary policy. (JEL E41, E47) DOI: 10.4038/ss.v34i1.1237 Staff Studies Volume 34 Numbers 1& 2 2004 p.1-12","PeriodicalId":362386,"journal":{"name":"Staff Studies","volume":"67 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127412905","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
High and volatile inflation could result in significant negative outcomes leading to loss of social welfare, which underscores the necessity of having in place an effective monetary policy regime. Increasingly larger numbers of countries have shifted to an inflation targeting regime, following the success of those that adopted inflation targeting in the early 1990s. Analysing Sri Lanka's monetary policy regime suggests that, monetary targeting, although appropriate for effectively controlling inflation, seems to lack the institutional features that have enabled inflation targeting regimes to achieve low and stable inflation in the long-run. This makes inflation targeting an attractive alternative to countries presently in a monetary targeting regime, experiencing high or volatile inflation. (JEL E42) DOI: 10.4038/ss.v38i1.1221 Staff Studies Volume 38 Numbers 1& 2 2008 p.45-74
{"title":"Inflation Targeting versus Monetary Targeting - The Case of Sri Lanka","authors":"Manisha Wimalasuriya","doi":"10.4038/SS.V38I1.1221","DOIUrl":"https://doi.org/10.4038/SS.V38I1.1221","url":null,"abstract":"High and volatile inflation could result in significant negative outcomes leading to loss of social welfare, which underscores the necessity of having in place an effective monetary policy regime. Increasingly larger numbers of countries have shifted to an inflation targeting regime, following the success of those that adopted inflation targeting in the early 1990s. Analysing Sri Lanka's monetary policy regime suggests that, monetary targeting, although appropriate for effectively controlling inflation, seems to lack the institutional features that have enabled inflation targeting regimes to achieve low and stable inflation in the long-run. This makes inflation targeting an attractive alternative to countries presently in a monetary targeting regime, experiencing high or volatile inflation. (JEL E42) DOI: 10.4038/ss.v38i1.1221 Staff Studies Volume 38 Numbers 1& 2 2008 p.45-74","PeriodicalId":362386,"journal":{"name":"Staff Studies","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124943516","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines the validity of the export-led growth hypothesis (ELG) for Sri Lanka using annual data over the period 1960-2005, employing time-series analysis techniques of cointegration, causality, Vector Auto Regressions (VARs) and Impulse Response Functions (IRFs). This study controls for other macroeconomic variables that might have a significant effect on export-economic growth relationship. The findings do not provide empirical support for the export-led growth hypothesis for Sri Lanka. DOI: 10.4038/ss.v38i1.1222 Staff Studies Volume 38 Numbers 1& 2 2008 p.75-94
{"title":"Is the Export-Led Growth Hypothesis Valid for Sri Lanka? A Time-Series Analysis of Export-Led Growth hypothesis","authors":"W. Dilrukshini","doi":"10.4038/SS.V38I1.1222","DOIUrl":"https://doi.org/10.4038/SS.V38I1.1222","url":null,"abstract":"This study examines the validity of the export-led growth hypothesis (ELG) for Sri Lanka using annual data over the period 1960-2005, employing time-series analysis techniques of cointegration, causality, Vector Auto Regressions (VARs) and Impulse Response Functions (IRFs). This study controls for other macroeconomic variables that might have a significant effect on export-economic growth relationship. The findings do not provide empirical support for the export-led growth hypothesis for Sri Lanka. DOI: 10.4038/ss.v38i1.1222 Staff Studies Volume 38 Numbers 1& 2 2008 p.75-94","PeriodicalId":362386,"journal":{"name":"Staff Studies","volume":"44 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125905948","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Based on a vector autoregressive (VAR) framework and utilising both recursive and structural specifications, this study analyses the effects of interest rate, money growth and the movements in nominal exchange rate on real GDP growth and inflation in Sri Lanka for the period from 1978 to 2005. The results of the recursive VARs are broadly in line with the established empirical findings, especially when the interest rate is considered the monetary policy variable. Following a positive innovation in interest rate, GDP growth and inflation decrease while the exchange rate appreciates. When money growth and exchange rate are used as policy indicators, the impact on GDP growth contrasts with established findings. However, as expected, an exchange rate appreciation has an immediate impact on the reduction of inflation. Interest rate innovations are persistent, supporting the view that the monetary authority adjusts interest rates gradually, while innovations in money growth and exchange rate appreciation are not persistent. Several puzzling results emerge from the study: for most sub-samples, inflation does not decline following a contractionary policy shock; innovations to money growth raises the interest rate; when inflation does respond, it reacts to monetary innovations faster than GDP growth does; and exchange rate appreciations almost always lead to an increase in GDP growth. The results from the semi-structural VARs, which impose identification restrictions only on the policy block, are not different from those obtained from recursive VARs. The results show that none of the sub-samples since 1978 can be identified with a particular targeting regime. In contrast, the interest rate, monetary aggregates and the exchange rate, contain important information in relation to the monetary policy stance. Based on this premise, a monetary policy index is estimated for Sri Lanka. The index displays that unanticipated monetary policy forms a smaller portion of monetary policy action in comparison to anticipated monetary policy. It is also observed that a decline in GDP growth is associated with anticipated policy with a short lag, while reductions in inflation are associated with both anticipated and unanticipated components of monetary policy with a longer lag of 28 to 36 months. DOI: 10.4038/ss.v38i1.1220 Staff Studies Volume 38 Numbers 1& 2 2008 p.1-44
{"title":"The Impact of Monetary Policy on Economic Growth and Inflation in Sri Lanka","authors":"C. Amarasekara","doi":"10.4038/SS.V38I1.1220","DOIUrl":"https://doi.org/10.4038/SS.V38I1.1220","url":null,"abstract":"Based on a vector autoregressive (VAR) framework and utilising both recursive and structural specifications, this study analyses the effects of interest rate, money growth and the movements in nominal exchange rate on real GDP growth and inflation in Sri Lanka for the period from 1978 to 2005. The results of the recursive VARs are broadly in line with the established empirical findings, especially when the interest rate is considered the monetary policy variable. Following a positive innovation in interest rate, GDP growth and inflation decrease while the exchange rate appreciates. When money growth and exchange rate are used as policy indicators, the impact on GDP growth contrasts with established findings. However, as expected, an exchange rate appreciation has an immediate impact on the reduction of inflation. Interest rate innovations are persistent, supporting the view that the monetary authority adjusts interest rates gradually, while innovations in money growth and exchange rate appreciation are not persistent. Several puzzling results emerge from the study: for most sub-samples, inflation does not decline following a contractionary policy shock; innovations to money growth raises the interest rate; when inflation does respond, it reacts to monetary innovations faster than GDP growth does; and exchange rate appreciations almost always lead to an increase in GDP growth. The results from the semi-structural VARs, which impose identification restrictions only on the policy block, are not different from those obtained from recursive VARs. The results show that none of the sub-samples since 1978 can be identified with a particular targeting regime. In contrast, the interest rate, monetary aggregates and the exchange rate, contain important information in relation to the monetary policy stance. Based on this premise, a monetary policy index is estimated for Sri Lanka. The index displays that unanticipated monetary policy forms a smaller portion of monetary policy action in comparison to anticipated monetary policy. It is also observed that a decline in GDP growth is associated with anticipated policy with a short lag, while reductions in inflation are associated with both anticipated and unanticipated components of monetary policy with a longer lag of 28 to 36 months. DOI: 10.4038/ss.v38i1.1220 Staff Studies Volume 38 Numbers 1& 2 2008 p.1-44","PeriodicalId":362386,"journal":{"name":"Staff Studies","volume":"125 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-10-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131214566","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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