Interest Rate as a Policy Instrument – Recent Experience of Sri Lanka
Dr. W. M. Hemachandra is the Director of Policy Review and Monitoring Department of the Central Bank of Sri Lanka. He holds a Ph.D. in Economics from Colombo University, Sri Lanka and a Masters Degree in Economics from Simon Fraser University, Canada. He received a B.Sc. first class Business Administration Degree from Sri Jayawardenepura University of Sri Lanka and a Diploma in Accountancy from Sri Lanka Technical College. His research interests are in Macroeconomic Policies, Quantitative Economics, Debt Management and Financial Institutions/Markets, Monetary and Financial Policy, Issues in Development Economics and Payments and Settlement Issues.
Interest rate is used as a monetary policy instrument in most countries. Sri Lanka too, uses interest rates as one of the policy instruments to achieve the objectives of the Central Bank. In this paper, the relationships between policy rates and other macroeconomic variables are identified and empirical estimations are carried out to find out to what extent the interest rates could be used to manage macroeconomic variables, based on which some policy implications are suggested.