MONETARY POLICY RULES AND MACROECONOMIC STABILITY: EVIDENCE FROM SRI LANKA
This study estimates the forward-looking monetary policy reaction function for SriLanka using monthly data from 1980 to 2017. The results indicate that the CentralBank of Sri Lanka (CBSL) followed the Taylor rule to set interest rates. Our forwardlookingmodel estimations show that the coefficient on inflation increases over time,reflecting the greater focus on price stability by the bank. The results suggest that theCBSL reacted to nominal exchange rate depreciation by tightening monetary policy.Although the degree of interest rate smoothness gradually decreases over time, thestudy shows that the CBSL did not react to movements in fiscal deficit during theperiod under investigation. This finding suggests that the inclusion of fiscal deficit inthe Taylor rule does not provide a better specification of the policy reaction functionin Sri Lanka.
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Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.