The effects of monetary shocks in Sri Lankan economy

Abstract

Monetary policy tools change from one country to another based on their legal and fiscal status. It is necessary to have models to understand monetary variables affecting the country's economy. This research study aims to evaluate the monetary variable shocks which affect the Sri Lankan economy. Five Structural Vector Autoregressive models called generic model, bank lending model, money effect model, exchange rate model and composite model were generated to evaluate the impacts of Sri Lankan Economy by the monetary variables Gross Domestic Product, Consumer Price Index, Reserve Money, Commercial Bank Loan, Money Supply, Bank Rate and Exchange Rate. It was found that, necessary action to be taken to implement appropriate monetary policies to keep gross domestic product in a progressive path. And keeping gross domestic product in a progressive path will lead Sri Lankan currency to appreciate against US dollar. Implementation of strong monetary policies to monitor bank rates and commercial bank loans closely will lead progressive economic growth.