Toward Inflation Targeting in Sri Lanka

Author/Editor: Ding Ding ; Rahul Anand ; Shanaka J. Peiris
Publication Date: April 01, 2011
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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.
Series: Working Paper No. 11/81
Subject(s): Forecasting models | Inflation targeting

Author's Keyword(s): Inflation Targeting | Monetary Policy | Bayesian Estimation
Publication Date: April 01, 2011
ISBN/ISSN: 9781455226078/1018-5941 Format: Paper
Stock No: WPIEA2011081 Pages: 28
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