Toward Inflation Targeting in Sri Lanka

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.
Publication date: April 2011
ISBN: 9781455226078
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Economics- Macroeconomics , Economics / General , International - Economics , inflation , monetary policy , central bank , foreign exchange , money stock , real interest rate , monetary fund , real money , inflation target , monetary aggregates , monetary transmission , money market , monetary transmission mechanism , monetary targeting , aggregate demand , nom

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