Inflation Targeting versus Monetary Targeting - The Case of Sri Lanka
S Manisha Wimalasuriya
Economic Research Department of the Central Bank of Sri Lanka, LK
Ms. Manisha Wimalasuriya is a Senior Economist of the Economic Research Department of the Central Bank of Sri Lanka. Her research interests are mainly in the areas of monetary policy and macroeconomic modelling. She has obtained a B.A. Honours Degree in Economics from the University of Colombo, an MBA from the University of Sri Jayewardenepura and an M.Sc. in Economics from the University of Essex, U.K.
High and volatile inflation could result in significant negative outcomes leading to loss of social welfare, which underscores the necessity of having in place an effective monetary policy regime. Increasingly larger numbers of countries have shifted to an inflation targeting regime, following the success of those that adopted inflation targeting in the early 1990s. Analysing Sri Lanka's monetary policy regime suggests that, monetary targeting, although appropriate for effectively controlling inflation, seems to lack the institutional features that have enabled inflation targeting regimes to achieve low and stable inflation in the long-run. This makes inflation targeting an attractive alternative to countries presently in a monetary targeting regime, experiencing high or volatile inflation. (JEL E42)