Assessing Monetary Policy Targeting Regimes for Small Open Economies

46 Pages Posted: 20 Jul 2018

See all articles by Harsha Paranavithana

Harsha Paranavithana

The University of Western Australia

Leandro M. Magnusson

University of Western Australia

Rod Tyers

Australian National University (ANU) - School of Economics; The University of Western Australia - Department of Economics

Date Written: July 8, 2018

Abstract

This paper quantifies the performance of five monetary policy regimes in controlling macroeconomic volatility triggered by a variety of supply, demand and external shocks in small open economies. While the proposed macroeconomic model is generic, the application is to the case of Sri Lanka. The investigated regimes separately target the exchange rate, a monetary aggregate, nominal GDP, the CPI inflation rate and a Taylor composite of output gaps and inflation. The results suggest that inflation targeting offers the least macro-economic volatility overall. Consistent with earlier research and Mundell’s financial trilemma, its stabilising power is greatest under demand and external shocks, which have grown more prominent as product and financial markets have opened.

Keywords: Macroeconomic volatility, Monetary policy, Mundell’s trilemma, Sri Lanka

JEL Classification: E47, E52, N15

Suggested Citation

Paranavithana, Harsha and Magnusson, Leandro M. and Tyers, Rod, Assessing Monetary Policy Targeting Regimes for Small Open Economies (July 8, 2018). CAMA Working Paper No. 33/2018. Available at SSRN: https://ssrn.com/abstract=3210384 or http://dx.doi.org/10.2139/ssrn.3210384

Harsha Paranavithana

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia

Leandro M. Magnusson

University of Western Australia ( email )

35 Stirling Highway, M251
Crawley, WA 6009
Australia
+61 8 6488 2924 (Phone)
+61 8 6488 1016 (Fax)

HOME PAGE: http://www.uwa.edu.au/people/Leandro.Magnusson

Rod Tyers (Contact Author)

Australian National University (ANU) - School of Economics ( email )

Arndt Building
Australian National University
Canberra, Australian Capital Territory 0200
Australia
61-6-249-5124 (Fax)

The University of Western Australia - Department of Economics ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia
61 8 6488 5632 (Phone)

HOME PAGE: http://www.business.uwa.edu.au/school/staff-profiles?type=profile&dn=cn%3DRodney%20Tyers%2Cou%3DEcon

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