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Monetary policy rules in practice: Evidence for Sri Lanka

Author

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  • Perera, Roshan
  • Jayawickrema, Vishuddhi

Abstract

The paper seeks to characterise the monetary policy decision making process for Sri Lanka using standard Taylor-type monetary policy rules. Alternative monetary policy reaction functions are estimated for Sri Lanka over the period 1996Q1 to 2013Q2. An open economy reaction function is used in the analysis where the central bank is assumed to respond to changes in inflation, the output gap and the exchange rate. A forward looking specification of the reaction function is found to provide the most appropriate characterisation of policy making at the Central Bank of Sri Lanka. The results indicate that the size of the coefficient on the inflation gap has increased over time reflecting a greater focus on price stability. However, the response of monetary policy to fluctuations in output has been greater than the response to deviations in inflation reflecting the central bank’s preference and the lower sensitivity of output to interest rate changes.

Suggested Citation

  • Perera, Roshan & Jayawickrema, Vishuddhi, 2014. "Monetary policy rules in practice: Evidence for Sri Lanka," MPRA Paper 95584, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:95584
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    References listed on IDEAS

    as
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    Cited by:

    1. Chandranath Amarasekara & Rahul Anand & Kithsiri Ehelepola & Hemantha Ekanayake & Vishuddhi Jayawickrema & Sujeetha Jegajeevan & Csaba Kober & Tharindi Nugawela & Sergey Plotnikov & Adam Remo & Poongo, 2018. "An Open Economy Quarterly Projection Model for Sri Lanka," IMF Working Papers 2018/149, International Monetary Fund.

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    More about this item

    Keywords

    Monetary Policy; Policy Interest Rates; Monetary Policy Reaction Function; Taylor Rule;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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