Towards Inflation Targeting in Sri Lanka

By Ding Ding, Rahul Anand, Shanaka J Peiris

April 1, 2011

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Ding Ding, Rahul Anand, and Shanaka J Peiris. Towards Inflation Targeting in Sri Lanka, (USA: International Monetary Fund, 2011) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Exchange rates, Inflation, Inflation targeting, Output gap, Real exchange rates

Keywords: Headline inflation, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/081
Stock No:

WPIEA2011081
ISBN:

9781455226078
ISSN:

1018-5941

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