Current Macroeconomic Policy Research Articles

Transmission of Monetary Policy Impulses on Bank Retail Interest Rates: An Empirical Study of Sri Lanka

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.

Characterising Alternative Fiscal Policy Rules for Sri Lanka

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.

Financial Intermediation Development and Economic Growth Nexus in Sri Lanka

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.

The Impact of Dividend Policy on Share Price Volatility: Evidence from Banking Stocks in Colombo Stock Exchange

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.

The Impact of Real Exchange Rate and its Misalignment on Export Performance in Sri Lanka

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.

Carry Trades and Tail Risk of Exchange Rates

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.

Tax Composition and Output Growth: Evidence from Sri Lanka

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.

Incidence and Duration of Fiscal Crises: Macroeconomic Determinants

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.

Macroeconomic Consequences of Terms of Trade Episodes, Past and Present

The early 21st century saw Australia experience its largest and longest terms of trade boom. This paper places this recent boom in a long-run historical context by comparing the current episode with earlier cycles. While similarities exist across most episodes, current macroeconomic policy frameworks and settings are quite different to those of the past. This mitigated the broader macroeconomic consequences of the upswing and as the terms of trade decline may do likewise.

Demand for and Adequacy of International Reserves in Sri Lanka

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.

From Where Does it Come? An Analysis of Currency Market Volatility in Sri Lanka

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.

Europe's Quest for Monetary Stability: Central Banking Gone Astray

This paper provides an overview of central banking arrangements in those European countries that have adopted the euro. Issues addressed include the structure of the Eurosystem and its central banking functions, the kind of independence granted to the system and the role of monetary policy that central bankers have adopted for themselves, the two-pillar policy framework, operating procedures, and actual performance since the euro's launch in 1999. The analysis concludes that, given the current macroeconomic policy regime, trends, and practices, the euro is on track for failure.

Trade Misinvoicing and Macroeconomic Outcomes in India

This paper has two main objectives. First, it computes capital flight (CF) through trade misinvoicing from India using data from UNCOMTRADE, MIT Observatory of Economic Complexity and IMF E-library. India’s trade with 17 countries over the period 1988-2012 is considered. We find that CF has accelerated since 2004 and particularly sharply since 2007. It peaked at nearly $40 billion in 2008 with the total outflow between 1988-2012 exceeding $186 billion. Second, we model the mutual dependence of GDP growth, CF, and various risk factors in a VAR framework. We find that the VAR models chosen fit the data well. We conduct impulse response function analysis, forecast the key variables until 2020 and forecast error variance decomposition. Broadly we find that, if left undisturbed, CF through trade misinvoicing will continue to be high and play a significant macroeconomic role. Thus, CF needs to be checked urgently not only because it is a drain of the country’s resources but also because it continues to have a significant and, by its very nature, uncontrollable effect on the economy. At least some of the failures of current macroeconomic policy in India could be attributed to CF.

Trade Misinvoicing and Macroeconomic Outcomes in India

This paper has two main objectives. First, it computes capital flight (CF) through trade misinvoicing from India using data from UNCOMTRADE, MIT Observatory of Economic Complexity and IMF E-library. India’s trade with 17 countries over the period 1988-2012 is considered. We find that CF has accelerated since 2004 and particularly sharply since 2007. It peaked at nearly $40 billion in 2008 with the total outflow between 1988-2012 exceeding $186 billion. Second, we model the mutual dependence of GDP growth, CF, and various risk factors in a VAR framework. We find that the VAR models chosen fit the data well. We conduct impulse response function analysis, forecast the key variables until 2020 and forecast error variance decomposition. Broadly we find that, if left undisturbed, CF through trade misinvoicing will continue to be high and play a significant macroeconomic role. Thus, CF needs to be checked urgently not only because it is a drain of the country’s resources but also because it continues to have a significant and, by its very nature, uncontrollable effect on the economy. At least some of the failures of current macroeconomic policy in India could be attributed to CF.

Monetary and Fiscal Policies for a Finite Planet

Current macroeconomic policy promotes continuous economic growth. Unemployment, poverty and debt are associated with insufficient growth. Economic activity depends upon the transformation of natural materials, ultimately returning to the environment as waste. Current levels of economic throughput exceed the planet’s carrying capacity. As a result of poorly constructed economic institutions, society faces the unacceptable choice between ecological catastrophe and human misery. A transition to a steady-state economy is required, characterized by a rate of throughput compatible with planetary boundaries. This paper contributes to the development of a steady-state economy by addressing US monetary and fiscal policies. A steady-state monetary policy would support counter-cyclical, debt-free vertical money creation through the public sector, in ways that contribute to sustainable well-being. The implication for a steady-state fiscal policy is that any lending or spending requires a careful balance of recovery of money, not as a means of revenue, but as an economic imperative to meet monetary policy goals. A steady-state fiscal policy would prioritize targeted public goods investments, taxation of ecological “bads” and economic rent and implementation of progressive tax structures. Institutional innovations are considered, including common asset trusts, to regulate throughput, and a public monetary trust, to strictly regulate money supply.

Macroeconomic policy formulation: functional finance versus sound finance

Current macroeconomic policy formulation emphasises trade-offs associated with promoting economic recovery through expansionary fiscal policy and the need to deliver ‘fiscal sustainability’ defined in terms of stabilising and reducing government debt ratios. This paper argues that these ‘tensions’ do not emerge from a considered interpretation of orthodox macroeconomic theory, but instead from the self-imposed ‘sound finance’ constraints that governments have placed on the formulation of macroeconomic policies. Lerner’s system of functional finance, said to have provided the logical framework for Keynes’s policy, has been largely neglected in the recent literature and policy deliberation. This paper considers the relevance of Lerner’s system of functional finance to contemporary macroeconomic policy formulation.

An Evolutionary Model of Bounded Rationality and Intelligence

BackgroundMost economic theories are based on the premise that individuals maximize their own self-interest and correctly incorporate the structure of their environment into all decisions, thanks to human intelligence. The influence of this paradigm goes far beyond academia–it underlies current macroeconomic and monetary policies, and is also an integral part of existing financial regulations. However, there is mounting empirical and experimental evidence, including the recent financial crisis, suggesting that humans do not always behave rationally, but often make seemingly random and suboptimal decisions.Methods and FindingsHere we propose to reconcile these contradictory perspectives by developing a simple binary-choice model that takes evolutionary consequences of decisions into account as well as the role of intelligence, which we define as any ability of an individual to increase its genetic success. If no intelligence is present, our model produces results consistent with prior literature and shows that risks that are independent across individuals in a generation generally lead to risk-neutral behaviors, but that risks that are correlated across a generation can lead to behaviors such as risk aversion, loss aversion, probability matching, and randomization. When intelligence is present the nature of risk also matters, and we show that even when risks are independent, either risk-neutral behavior or probability matching will occur depending upon the cost of intelligence in terms of reproductive success. In the case of correlated risks, we derive an implicit formula that shows how intelligence can emerge via selection, why it may be bounded, and how such bounds typically imply the coexistence of multiple levels and types of intelligence as a reflection of varying environmental conditions.ConclusionsRational economic behavior in which individuals maximize their own self interest is only one of many possible types of behavior that arise from natural selection. The key to understanding which types of behavior are more likely to survive is how behavior affects reproductive success in a given population’s environment. From this perspective, intelligence is naturally defined as behavior that increases the probability of reproductive success, and bounds on rationality are determined by physiological and environmental constraints.

Financial Crises and Impacts of Recent Financial Crises on Sri Lanka

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.

Interest Rate as a Policy Instrument – Recent Experience of Sri Lanka

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.

The Main Determinants of Inflation in Sri Lanka: A VAR based Analysis

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.