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The Impact of Monetary Policy on the Economy: A Case of Sri Lanka

Received: 26 April 2023     Accepted: 19 May 2023     Published: 5 June 2023
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Abstract

Central Banks (CB) formulate and implement monetary policy as a stabilization policy to achieve macroeconomic goals of countries’ economic growth while maintaining low and steady inflation. Accordingly, this study focuses on empirical investigation of the impact of monetary policy to the macroeconomic variables in the Sri Lankan economy. This study uses the recursive Structural Vector Autoregressive (SVAR) methodology to determine the impact of monetary policy decisions on the Gross Domestic Product (GDP), Inflation, Weighted Average Call Money Rate (WACMR) and Exchange of Sri Lanka. The model captures time series data from 1990 to 2016 on a quarterly basis. The econometrics estimate follows cholesky factorizations to determine the contemporaneous impact on policy shocks to the given macroeconomic variables. The results of the study are interpreted by the variance decomposition and impulse response function. Further, the results of are broadly consistent with the theoretical expectations and empirical studies. The study finds that there is a positive impact of money supply growth to the GDP and negative relationship of interest rate to the GDP and to the exchange rate. But this analysis study fails to provide a significant relationship of money to inflation during the selected period. Hence, Central Bank of Sri Lanka (CBSL) must keep their attention on new policy formulations to strengthen aforementioned relationship. Further, this comprehensive assessment on monetary policy transmission towards key macroeconomic variables reduces the research gap in this field of economics in Sri Lanka.

Published in International Journal of Economic Behavior and Organization (Volume 11, Issue 2)
DOI 10.11648/j.ijebo.20231102.14
Page(s) 61-79
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2023. Published by Science Publishing Group

Keywords

Monetary Policy, Macroeconomic Variables, SVAR, Variance Decomposition, Impulse Response Function

References
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[4] Amarasekara, C. (2009). The Impact of Monetary Policy on Economic Growth and Inflation in Sri Lanka. Staff Studies, 38, 1-44.
[5] Vinayagathasan, T. (2013). Monetary Policy and the Real Economy: A Structural VAR Approach for Sri Lanka. Tokyo: National Graduate Institute for Policy Studies.
[6] CBSL. (2015). Monetray Policy Money, Credit and Interest Rate. Colombo: Central Bank of Sri Lanka.
[7] Friedman, & Schwarz. (1963). Monetary History ofthe United States 1867-1960. Princeton: Princeton University Press for NBER.
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[9] Howells, P. (2010). The Money Supply in Macroeconomics. Bristol: Centre for Global Finance, Bristol Business School,.
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[11] Mathai, K. (2009, September). What is Monetary Policy. Finance & Development, pp. 46-47.
[12] European Central Bank. (2017). Transmission mechanism of monetary policy. Retrieved 09 12, 2017, from https://www.ecb.europa.eu/mopo/intro/transmission/html/index.en.html
[13] Mishra, P., & Montiel, P. (2012). How Effective Is Monetary Transmission in Low- Income Countries? A Survey of the Empirical Evidence. Washington, D. C.: International Monetary Fund.
[14] Das, S. (2015). Monetary Policy in India: Transmission to Bank Interest Rates. Washington, D. C.: International Monetary Fund.
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[24] Sims, C. (1980, January). Macroeconomics and Reality. EConometrica, 48 (1).
[25] Favero, C. (2001). Applied Macroeconometrics. Oxford: Oxford University Press.
[26] Nakahira, K. (2009). A Structural VAR analysis of the Monetary Policy Stance in Japan. The International Journal of Economic Policy Studies, 4 (5).
[27] Christiano, L., Eichenbaum, M., & Evans, C. (1996). The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds. The Review of Economics and Statistics, 78, 16-34.
[28] Liu, D., & Jansen, D. (2013). The effects of monetary policy using structural factor analysis. Applied Economics, 2511-2525.
[29] Mohamed Aslam, A. L. (2016). Impact of Money Supply on Sri Lankan Economy: An Econometric Analysis. International Letters of Social and Humanistic Sciences, 67, 11-17.
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Cite This Article
  • APA Style

    Morawaggoda Kankanamalage Tharaka Nayana Hansi. (2023). The Impact of Monetary Policy on the Economy: A Case of Sri Lanka. International Journal of Economic Behavior and Organization, 11(2), 61-79. https://doi.org/10.11648/j.ijebo.20231102.14

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    ACS Style

    Morawaggoda Kankanamalage Tharaka Nayana Hansi. The Impact of Monetary Policy on the Economy: A Case of Sri Lanka. Int. J. Econ. Behav. Organ. 2023, 11(2), 61-79. doi: 10.11648/j.ijebo.20231102.14

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    AMA Style

    Morawaggoda Kankanamalage Tharaka Nayana Hansi. The Impact of Monetary Policy on the Economy: A Case of Sri Lanka. Int J Econ Behav Organ. 2023;11(2):61-79. doi: 10.11648/j.ijebo.20231102.14

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  • @article{10.11648/j.ijebo.20231102.14,
      author = {Morawaggoda Kankanamalage Tharaka Nayana Hansi},
      title = {The Impact of Monetary Policy on the Economy: A Case of Sri Lanka},
      journal = {International Journal of Economic Behavior and Organization},
      volume = {11},
      number = {2},
      pages = {61-79},
      doi = {10.11648/j.ijebo.20231102.14},
      url = {https://doi.org/10.11648/j.ijebo.20231102.14},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijebo.20231102.14},
      abstract = {Central Banks (CB) formulate and implement monetary policy as a stabilization policy to achieve macroeconomic goals of countries’ economic growth while maintaining low and steady inflation. Accordingly, this study focuses on empirical investigation of the impact of monetary policy to the macroeconomic variables in the Sri Lankan economy. This study uses the recursive Structural Vector Autoregressive (SVAR) methodology to determine the impact of monetary policy decisions on the Gross Domestic Product (GDP), Inflation, Weighted Average Call Money Rate (WACMR) and Exchange of Sri Lanka. The model captures time series data from 1990 to 2016 on a quarterly basis. The econometrics estimate follows cholesky factorizations to determine the contemporaneous impact on policy shocks to the given macroeconomic variables. The results of the study are interpreted by the variance decomposition and impulse response function. Further, the results of are broadly consistent with the theoretical expectations and empirical studies. The study finds that there is a positive impact of money supply growth to the GDP and negative relationship of interest rate to the GDP and to the exchange rate. But this analysis study fails to provide a significant relationship of money to inflation during the selected period. Hence, Central Bank of Sri Lanka (CBSL) must keep their attention on new policy formulations to strengthen aforementioned relationship. Further, this comprehensive assessment on monetary policy transmission towards key macroeconomic variables reduces the research gap in this field of economics in Sri Lanka.},
     year = {2023}
    }
    

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  • TY  - JOUR
    T1  - The Impact of Monetary Policy on the Economy: A Case of Sri Lanka
    AU  - Morawaggoda Kankanamalage Tharaka Nayana Hansi
    Y1  - 2023/06/05
    PY  - 2023
    N1  - https://doi.org/10.11648/j.ijebo.20231102.14
    DO  - 10.11648/j.ijebo.20231102.14
    T2  - International Journal of Economic Behavior and Organization
    JF  - International Journal of Economic Behavior and Organization
    JO  - International Journal of Economic Behavior and Organization
    SP  - 61
    EP  - 79
    PB  - Science Publishing Group
    SN  - 2328-7616
    UR  - https://doi.org/10.11648/j.ijebo.20231102.14
    AB  - Central Banks (CB) formulate and implement monetary policy as a stabilization policy to achieve macroeconomic goals of countries’ economic growth while maintaining low and steady inflation. Accordingly, this study focuses on empirical investigation of the impact of monetary policy to the macroeconomic variables in the Sri Lankan economy. This study uses the recursive Structural Vector Autoregressive (SVAR) methodology to determine the impact of monetary policy decisions on the Gross Domestic Product (GDP), Inflation, Weighted Average Call Money Rate (WACMR) and Exchange of Sri Lanka. The model captures time series data from 1990 to 2016 on a quarterly basis. The econometrics estimate follows cholesky factorizations to determine the contemporaneous impact on policy shocks to the given macroeconomic variables. The results of the study are interpreted by the variance decomposition and impulse response function. Further, the results of are broadly consistent with the theoretical expectations and empirical studies. The study finds that there is a positive impact of money supply growth to the GDP and negative relationship of interest rate to the GDP and to the exchange rate. But this analysis study fails to provide a significant relationship of money to inflation during the selected period. Hence, Central Bank of Sri Lanka (CBSL) must keep their attention on new policy formulations to strengthen aforementioned relationship. Further, this comprehensive assessment on monetary policy transmission towards key macroeconomic variables reduces the research gap in this field of economics in Sri Lanka.
    VL  - 11
    IS  - 2
    ER  - 

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Author Information
  • Faculty of Arts, University of Colombo, Colombo, Sri Lanka

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