Revisiting monetary policy transmission in a new inflation targeting country

Bhavesh Garg, Sayar Ahmad Shah and Janaka Edirisinghe

Journal of Asian Economics, 2025, vol. 100, issue C

Abstract: We investigate the monetary policy transmission mechanism in Sri Lanka, which is gradually transitioning towards a flexible inflation targeting framework and has adopted this approach on a de facto basis. Using monthly data from 2020 to 2023, the findings highlight the interest rate channel as playing a more significant role than the exchange rate channel in transmitting the policy interventions to the final output. Key results suggest that under a strict inflation targeting regime, monetary transmission is more potent compared to a flexible inflation targeting framework. Therefore, to enhance monetary policy effectiveness, Sri Lanka should focus on the robust implementation of an inflation-targeting regime.

Keywords: Monetary transmission; DSGE; Exchange rate; Interest rate; Inflation targeting (search for similar items in EconPapers)
JEL-codes: C63 C68 D58 E52 E58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:100:y:2025:i:c:s1049007825001502

DOI: 10.1016/j.asieco.2025.102026

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