Monetary policy transmission in Sri Lanka

Muhammadu Theseem Musthafa, Thanh Le and Sandy Suardi

Applied Economics, 2024, vol. 56, issue 2, 151-168

Abstract: Sri Lanka’s monetary policy has evolved differently during and after a three-decade-long ethnic conflict. This paper empirically investigates effects of monetary policy shocks on Sri Lankan economy with particular focus on the strength of credit and exchange rate channels using a VAR model for 2003–2019 period. We find that: (i) monetary policy shocks have a significant and persistent impact on key macroeconomic variables even though several puzzling results emerge; (ii) the effects of monetary policy shocks are significant and more persistent in the post-conflict period than in the conflict period; (iii) a tight monetary policy effectively contains inflation in the post-conflict period; and (iv) interest rate and exchange rate channels play a dominant role while the credit channel responds with some lags in the post-conflict period.

Date: 2024
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DOI: 10.1080/00036846.2023.2166671

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