An Open Economy Quarterly Projection Model for Sri Lanka

Chandranath Amarasekara · Rahul Anand · Kithsiri Ehelepola · Hemantha Ekanayake · Vishuddhi Jayawickrema · Sujeetha Jegajeevan · Csaba Kober · Tharindi Nugawela · Sergey Plotnikov · Adam Remo · Poongothai Venuganan · Rasika Yatigammana

jun 2018 · International Monetary Fund

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This study documents a semi-structural model developed for Sri Lanka. This model, extended with a fiscal sector block, is expected to serve as a core forecasting model in the process of the Central Bank of Sri Lanka’s move towards flexible inflation targeting. The model includes a forward-looking endogenous interest rate and foreign exchange rate policy rules allowing for flexible change in policy behavior. It is a gap model that allows for simultaneous identification of business cycle position and long-term equilibrium. The model was first calibrated and then its data-fit was improved using Bayesian estimation technique with relatively tight priors.