Monetary policy and inflation–output variability in Sri Lanka: Lessons for developing economies

This paper considers the impact of monetary policy on the inflation–output variability trade-off for Sri Lanka and in doing so, draws lessons for the formulation of early-stage monetary policy in developing economies. We examine how this trade-off has changed across different monetary policy episodes, and investigate the persistence of economic shocks on the variability of inflation and output. After exploring the contribution of monetary policy towards macroeconomic performance more generally, we use the experience of Sri Lanka to suggest that more recently formed central banks in developing economies should focus on inflation variability, especially where the impact of demand and supply shocks is less persistent.