An Open Economy Quarterly Projection Model for Sri Lanka

Abstract

This study documents a semi-structural model developed for Sri Lanka. This model, extended with a fiscal sector block, is expected to serve as a core forecasting model in the process of the Central Bank of Sri Lanka's move towards flexible inflation targeting. The model includes a forward-looking endogenous interest rate and foreign exchange rate policy rules allowing for flexible change in policy behavior. It is a gap model that allows for simultaneous identification of business cycle position and long-term equilibrium. The model was first calibrated and then its data-fit was improved using Bayesian estimation technique with relatively tight priors.

Achieving the Bank of Japan’s Inflation Target

“…For some preliminary impact of Japan's negative interest rate policy, seeHong and Kandrac (2018).7 Among others, seeBenes et al (2017) for India andAmarasekara et al (2018) for Sri Lanka.©International Monetary Fund. Not for Redistribution…”