Monetary Policy and Inflation Performance: Evidence from Exchange Rate Regimes in Sri Lanka

Harischandra, Pkg

doi:10.4038/ss.v37i1.1227

Cited by 1 publication

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“…Several theoretical and empirical studies have shown inflation being influenced by both demand- and supply-side factors (Bandara, 1996; Colombage, 2005; Cooray, 2008; Deyshappriya, 2014; Jayawardena & Jayasinghe, 2016; Kulatunge, 2012; Nicholas, 1993; Ratnasiri, 2009; Rupananda, 1994; Weerasekara, 1992). Furthermore, the literature on inflation has discussed, inter alia , inflation persistence across exchange rate regimes (Harischandra, 2007), the magnitude of pass-through rates (Wimalasuriya, 2007), monetary policy impact on growth and inflation (Amarasekara, 2008), inflation–unemployment trade-off (Amarasekara & Bratsiotis, 2015), inflation–output trade-off (Kesavarajah & Middleditch, 2019) and the contribution of oil price (Perera, 2005) and other factors to the inflation in Sri Lanka (De Silva, 2017). Samaratunga and Perera (2015) looked at the demand and adequacy of international reserves in Sri Lanka.…”

Section: Inflation and Foreign Reserves: Brief Review Of The Literaturementioning

confidence: 99%

The Nexus Of Foreign Reserves, Exchange Rate And Inflation: Recent Empirical Evidence From Sri Lanka

Ariyasinghe¹,

Cooray

2021

South Asia Economic Journal

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The conventional mandates of the central banks on meeting stability objectives and maintaining a growth-maximizing inflation rate have come under some criticism since the global financial crises. Maintaining adequate foreign reserves is seen as a viable solution to foreign exchange liquidity needs during crisis periods. Since the end of 2011, many Asian economies, including China and Japan, led from the forefront in central bank-led reserves build-up. However, reserves build-up remains challenging and sensitive for small open economies. Such policies help create ‘risk-neutral’ buffers for monetary and fiscal authorities to absorb transitory current account shocks and foreign exchange stress to smoothen the balance of payments. This study is motivated by the importance of identifying the inflation–foreign reserves nexus that may affect inflation in a manner counterproductive to the central bank mandate of maintaining price stability. It probes the debate of the sustainability of reserves build-up in the long and the short term. The outcome of the study poses several vital questions for fiscal and monetary policymakers concerning their respective mandates. The reserves–inflation nexus and its magnitude is determined using monthly data spanning two decades, through engaging an autoregressive distributed lag (ARDL) model and relevant bounds-testing techniques proposed by Pesaran et al. The vector autoregression (VAR), error correction and Johansen cointegration methods supplement the robustness checks. Exchange rate is introduced to enrich the discussion on the reserves–inflation nexus and shows a cointegration relationship in the long run. The study provides an insight into the influence of exchange rate on reserves and inflation. The variance decomposition shows the presence of a lukewarm response from foreign reserves and exchange rate on inflation. Policymakers concerned with inflationary expectations in the medium-to-long term need to consider these signals, as reserves build-up is one of the important policy-driven objectives for a number of economies.

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Section: Inflation and Foreign Reserves: Brief Review Of The Literaturementioning

confidence: 99%

The Nexus Of Foreign Reserves, Exchange Rate And Inflation: Recent Empirical Evidence From Sri Lanka

Ariyasinghe¹,

Cooray

2021

South Asia Economic Journal

View full text Add to dashboard Cite

show abstract

Monetary Policy and Inflation Performance: Evidence from Exchange Rate Regimes in Sri Lanka

Abstract: This paper examines empirical evidence on monetary policy and inflation

Cited by 1 publication

References 38 publications

The Nexus Of Foreign Reserves, Exchange Rate And Inflation: Recent Empirical Evidence From Sri Lanka

The Nexus Of Foreign Reserves, Exchange Rate And Inflation: Recent Empirical Evidence From Sri Lanka

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