Monetary Transmission Mechanism in Sri Lanka: A Comprehensive Assessment with New Evidence
Dr. Anil Perera is a Senior Economist attached to the Economic Research Department of Central Bank of Sri Lanka. He received a BA Special Degree in Economics with First Class Honours from the University of Sri Jayewardenepura, Sri Lanka and Master of Social Sciences Degree in Economics from the University of Kelaniya, Sri Lanka. He received his Ph.D. Degree from Monash University, Australia. His research interests are in the fields of Monetary Policy, Financial Markets and Macroeconomic Management.
This study provides a comprehensive assessment of the transmission of monetary policy in Sri Lanka starting from changes to central bank policy to the response of final target variables-output and prices. As such, the study provides estimates for interest rate pass-through and suggests that pass-through is yet to achieve the completeness except for prime lending rates. Based on the empirical estimates obtained employing both unrestricted and structural vector auto regressions, this study observes that monetary policy in Sri Lanka is quite effective to influence the target variables of the central bank. It also suggests that monetary policy changes affect target variables through different intermediate transmission channels such as bank credit, exchange rates as well as asset prices. These results provide important policy implications for the Central Bank of Sri Lanka in the conduct of monetary policy and assessing its effectiveness.