Towards Inflation Targeting in Sri Lanka

Ding Ding, Rahul Anand and Shanaka Peiris

No 2011/081, IMF Working Papers from International Monetary Fund

Abstract: This paper develops a practical model-based forecasting and policy analysis system (FPAS) to support a transition to an inflation forecast targeting regime in Sri Lanka. The FPAS model provides a relatively good forecast for inflation and a framework to evaluate policy trade-offs. The model simulations suggest that an open-economy inflation targeting rule can reduce macroeconomic volatility and anchor inflationary expectations given the size and type of shocks faced by the economy. Sri Lanka could aim to target a broad inflation range initially due to its susceptibility supply-side shocks while enhancing exchange rate flexibility and strengthening the effectiveness of monetary policy in the transition to an inflation forecast targeting regime.

Keywords: WP; headline inflation (search for similar items in EconPapers)
Pages: 28
Date: 2011-04-01
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Citations: View citations in EconPapers (8)

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