The Impact of Monetary Policy on the Economy: A Case of Sri Lanka

Morawaggoda Kankanamalage Tharaka Nayana Hansi

doi:doi:10.11648/j.ijebo.20231102.14

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The Impact of Monetary Policy on the Economy: A Case of Sri Lanka

Morawaggoda Kankanamalage Tharaka Nayana Hansi

Published in International Journal of Economic Behavior and Organization (Volume 11, Issue 2)

Received: 26 April 2023 Accepted: 19 May 2023 Published: 5 June 2023

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Abstract

Central Banks (CB) formulate and implement monetary policy as a stabilization policy to achieve macroeconomic goals of countries’ economic growth while maintaining low and steady inflation. Accordingly, this study focuses on empirical investigation of the impact of monetary policy to the macroeconomic variables in the Sri Lankan economy. This study uses the recursive Structural Vector Autoregressive (SVAR) methodology to determine the impact of monetary policy decisions on the Gross Domestic Product (GDP), Inflation, Weighted Average Call Money Rate (WACMR) and Exchange of Sri Lanka. The model captures time series data from 1990 to 2016 on a quarterly basis. The econometrics estimate follows cholesky factorizations to determine the contemporaneous impact on policy shocks to the given macroeconomic variables. The results of the study are interpreted by the variance decomposition and impulse response function. Further, the results of are broadly consistent with the theoretical expectations and empirical studies. The study finds that there is a positive impact of money supply growth to the GDP and negative relationship of interest rate to the GDP and to the exchange rate. But this analysis study fails to provide a significant relationship of money to inflation during the selected period. Hence, Central Bank of Sri Lanka (CBSL) must keep their attention on new policy formulations to strengthen aforementioned relationship. Further, this comprehensive assessment on monetary policy transmission towards key macroeconomic variables reduces the research gap in this field of economics in Sri Lanka.

Published in	International Journal of Economic Behavior and Organization (Volume 11, Issue 2)
DOI	10.11648/j.ijebo.20231102.14
Page(s)	61-79
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2023. Published by Science Publishing Group

Keywords

Monetary Policy, Macroeconomic Variables, SVAR, Variance Decomposition, Impulse Response Function

References

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Morawaggoda Kankanamalage Tharaka Nayana Hansi. (2023). The Impact of Monetary Policy on the Economy: A Case of Sri Lanka. International Journal of Economic Behavior and Organization, 11(2), 61-79. https://doi.org/10.11648/j.ijebo.20231102.14

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Morawaggoda Kankanamalage Tharaka Nayana Hansi. The Impact of Monetary Policy on the Economy: A Case of Sri Lanka. Int. J. Econ. Behav. Organ. 2023, 11(2), 61-79. doi: 10.11648/j.ijebo.20231102.14

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AMA Style

Morawaggoda Kankanamalage Tharaka Nayana Hansi. The Impact of Monetary Policy on the Economy: A Case of Sri Lanka. Int J Econ Behav Organ. 2023;11(2):61-79. doi: 10.11648/j.ijebo.20231102.14

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@article{10.11648/j.ijebo.20231102.14,
  author = {Morawaggoda Kankanamalage Tharaka Nayana Hansi},
  title = {The Impact of Monetary Policy on the Economy: A Case of Sri Lanka},
  journal = {International Journal of Economic Behavior and Organization},
  volume = {11},
  number = {2},
  pages = {61-79},
  doi = {10.11648/j.ijebo.20231102.14},
  url = {https://doi.org/10.11648/j.ijebo.20231102.14},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijebo.20231102.14},
  abstract = {Central Banks (CB) formulate and implement monetary policy as a stabilization policy to achieve macroeconomic goals of countries’ economic growth while maintaining low and steady inflation. Accordingly, this study focuses on empirical investigation of the impact of monetary policy to the macroeconomic variables in the Sri Lankan economy. This study uses the recursive Structural Vector Autoregressive (SVAR) methodology to determine the impact of monetary policy decisions on the Gross Domestic Product (GDP), Inflation, Weighted Average Call Money Rate (WACMR) and Exchange of Sri Lanka. The model captures time series data from 1990 to 2016 on a quarterly basis. The econometrics estimate follows cholesky factorizations to determine the contemporaneous impact on policy shocks to the given macroeconomic variables. The results of the study are interpreted by the variance decomposition and impulse response function. Further, the results of are broadly consistent with the theoretical expectations and empirical studies. The study finds that there is a positive impact of money supply growth to the GDP and negative relationship of interest rate to the GDP and to the exchange rate. But this analysis study fails to provide a significant relationship of money to inflation during the selected period. Hence, Central Bank of Sri Lanka (CBSL) must keep their attention on new policy formulations to strengthen aforementioned relationship. Further, this comprehensive assessment on monetary policy transmission towards key macroeconomic variables reduces the research gap in this field of economics in Sri Lanka.},
 year = {2023}
}

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TY  - JOUR
T1  - The Impact of Monetary Policy on the Economy: A Case of Sri Lanka
AU  - Morawaggoda Kankanamalage Tharaka Nayana Hansi
Y1  - 2023/06/05
PY  - 2023
N1  - https://doi.org/10.11648/j.ijebo.20231102.14
DO  - 10.11648/j.ijebo.20231102.14
T2  - International Journal of Economic Behavior and Organization
JF  - International Journal of Economic Behavior and Organization
JO  - International Journal of Economic Behavior and Organization
SP  - 61
EP  - 79
PB  - Science Publishing Group
SN  - 2328-7616
UR  - https://doi.org/10.11648/j.ijebo.20231102.14
AB  - Central Banks (CB) formulate and implement monetary policy as a stabilization policy to achieve macroeconomic goals of countries’ economic growth while maintaining low and steady inflation. Accordingly, this study focuses on empirical investigation of the impact of monetary policy to the macroeconomic variables in the Sri Lankan economy. This study uses the recursive Structural Vector Autoregressive (SVAR) methodology to determine the impact of monetary policy decisions on the Gross Domestic Product (GDP), Inflation, Weighted Average Call Money Rate (WACMR) and Exchange of Sri Lanka. The model captures time series data from 1990 to 2016 on a quarterly basis. The econometrics estimate follows cholesky factorizations to determine the contemporaneous impact on policy shocks to the given macroeconomic variables. The results of the study are interpreted by the variance decomposition and impulse response function. Further, the results of are broadly consistent with the theoretical expectations and empirical studies. The study finds that there is a positive impact of money supply growth to the GDP and negative relationship of interest rate to the GDP and to the exchange rate. But this analysis study fails to provide a significant relationship of money to inflation during the selected period. Hence, Central Bank of Sri Lanka (CBSL) must keep their attention on new policy formulations to strengthen aforementioned relationship. Further, this comprehensive assessment on monetary policy transmission towards key macroeconomic variables reduces the research gap in this field of economics in Sri Lanka.
VL  - 11
IS  - 2
ER  -

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Author Information

Morawaggoda Kankanamalage Tharaka Nayana Hansi

Faculty of Arts, University of Colombo, Colombo, Sri Lanka

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APA Style

Morawaggoda Kankanamalage Tharaka Nayana Hansi. (2023). The Impact of Monetary Policy on the Economy: A Case of Sri Lanka. International Journal of Economic Behavior and Organization, 11(2), 61-79. https://doi.org/10.11648/j.ijebo.20231102.14

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ACS Style

Morawaggoda Kankanamalage Tharaka Nayana Hansi. The Impact of Monetary Policy on the Economy: A Case of Sri Lanka. Int. J. Econ. Behav. Organ. 2023, 11(2), 61-79. doi: 10.11648/j.ijebo.20231102.14

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AMA Style

Morawaggoda Kankanamalage Tharaka Nayana Hansi. The Impact of Monetary Policy on the Economy: A Case of Sri Lanka. Int J Econ Behav Organ. 2023;11(2):61-79. doi: 10.11648/j.ijebo.20231102.14

Copy | Download

@article{10.11648/j.ijebo.20231102.14,
  author = {Morawaggoda Kankanamalage Tharaka Nayana Hansi},
  title = {The Impact of Monetary Policy on the Economy: A Case of Sri Lanka},
  journal = {International Journal of Economic Behavior and Organization},
  volume = {11},
  number = {2},
  pages = {61-79},
  doi = {10.11648/j.ijebo.20231102.14},
  url = {https://doi.org/10.11648/j.ijebo.20231102.14},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijebo.20231102.14},
  abstract = {Central Banks (CB) formulate and implement monetary policy as a stabilization policy to achieve macroeconomic goals of countries’ economic growth while maintaining low and steady inflation. Accordingly, this study focuses on empirical investigation of the impact of monetary policy to the macroeconomic variables in the Sri Lankan economy. This study uses the recursive Structural Vector Autoregressive (SVAR) methodology to determine the impact of monetary policy decisions on the Gross Domestic Product (GDP), Inflation, Weighted Average Call Money Rate (WACMR) and Exchange of Sri Lanka. The model captures time series data from 1990 to 2016 on a quarterly basis. The econometrics estimate follows cholesky factorizations to determine the contemporaneous impact on policy shocks to the given macroeconomic variables. The results of the study are interpreted by the variance decomposition and impulse response function. Further, the results of are broadly consistent with the theoretical expectations and empirical studies. The study finds that there is a positive impact of money supply growth to the GDP and negative relationship of interest rate to the GDP and to the exchange rate. But this analysis study fails to provide a significant relationship of money to inflation during the selected period. Hence, Central Bank of Sri Lanka (CBSL) must keep their attention on new policy formulations to strengthen aforementioned relationship. Further, this comprehensive assessment on monetary policy transmission towards key macroeconomic variables reduces the research gap in this field of economics in Sri Lanka.},
 year = {2023}
}

Copy | Download

TY  - JOUR
T1  - The Impact of Monetary Policy on the Economy: A Case of Sri Lanka
AU  - Morawaggoda Kankanamalage Tharaka Nayana Hansi
Y1  - 2023/06/05
PY  - 2023
N1  - https://doi.org/10.11648/j.ijebo.20231102.14
DO  - 10.11648/j.ijebo.20231102.14
T2  - International Journal of Economic Behavior and Organization
JF  - International Journal of Economic Behavior and Organization
JO  - International Journal of Economic Behavior and Organization
SP  - 61
EP  - 79
PB  - Science Publishing Group
SN  - 2328-7616
UR  - https://doi.org/10.11648/j.ijebo.20231102.14
AB  - Central Banks (CB) formulate and implement monetary policy as a stabilization policy to achieve macroeconomic goals of countries’ economic growth while maintaining low and steady inflation. Accordingly, this study focuses on empirical investigation of the impact of monetary policy to the macroeconomic variables in the Sri Lankan economy. This study uses the recursive Structural Vector Autoregressive (SVAR) methodology to determine the impact of monetary policy decisions on the Gross Domestic Product (GDP), Inflation, Weighted Average Call Money Rate (WACMR) and Exchange of Sri Lanka. The model captures time series data from 1990 to 2016 on a quarterly basis. The econometrics estimate follows cholesky factorizations to determine the contemporaneous impact on policy shocks to the given macroeconomic variables. The results of the study are interpreted by the variance decomposition and impulse response function. Further, the results of are broadly consistent with the theoretical expectations and empirical studies. The study finds that there is a positive impact of money supply growth to the GDP and negative relationship of interest rate to the GDP and to the exchange rate. But this analysis study fails to provide a significant relationship of money to inflation during the selected period. Hence, Central Bank of Sri Lanka (CBSL) must keep their attention on new policy formulations to strengthen aforementioned relationship. Further, this comprehensive assessment on monetary policy transmission towards key macroeconomic variables reduces the research gap in this field of economics in Sri Lanka.
VL  - 11
IS  - 2
ER  -

Copy | Download