Towards Inflation Targeting in Sri Lanka

• Author(s): Rahul Anand, Ding Ding, Mr.Shanaka J. Peiris,
• Publisher: International Monetary Fund
• Pages: 28
• ISBN_10: 1455226076
  ISBN_13: 9781455226078
  
• Language: en
• Categories: Business & Economics / Foreign Exchange , Business & Economics / Money & Monetary Policy , Business & Economics / Inflation ,

Description:... 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.