Based on a vector autoregressive (VAR)

The Central Bank of Sri Lanka has increasingly been relying on interest rates as the instrument for conducting monetary policy. Changes to the key monetary policy variables, the Repo and the Reverse Repo rates, are initially expected to be reflected in the OMO rates and the call money market rates, before being passedthrough to commercial bank retail interest rates. It is important to obtain a good understanding of the speed and magnitude of the interest rate pass-through to make timely monetary policy decisions in order to meet the objective of economic and price stability. This paper examines the size and speed of the pass-through from policy interest rates to call money market rates and from call money market rates to commercial bank retail interest rates. The paper concludes that the CBSL policy decisions are efficiently transmitted to the short end of the money market within a matter of days. Also, the pass-through from policy interest rates to the call money market rate is almost complete. However, the pass-through from call money market rates to both lending rates and deposit interest rates of commercial banks is sluggish and incomplete. The only exception is, perhaps, the rates on lending to prime customers, which show a faster and a fuller pass-through. Also, there is no evidence of an asymmetry of pass-through over different phases of the interest rate cycle.

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In this paper, we assess the role of investment in research and development (R&D) and economic policy uncertainty (EPU) in Sri Lanka’s economic growth experience. We do this by first determining which endogenous growth theories best explain the evolution of total factor productivity (TFP) in the country. Using historical time series data (1980–2018), we find that semi-endogenous growth theories best explain the evolution of TFP in Sri Lanka. This evidence suggests that R&D is critical to the country’s TFP expansion. We find that, through R&D, EPU has a crucial detrimental impact on TFP growth, although it is short-lived. Our findings are robust and have important implications for R&D investment and for moderating EPU.

This study examines the impact of monetary policy shocks on output, prices and interest rates in Sri Lanka during the period 2003–2012. It finds a strong transmission of policy rate shocks onto the money market rates and the government securities market yields. However, banking sector interest rates exhibit a smaller and slower impact compared to money and government securities market rates. The study also finds a weak policy interest rate transmission onto the real sector and prices. The direction of relationships between variables and policy shocks is in conformity with the existing theoretical and empirical priors. The existence of a large informal economy, volatile excess market liquidity, shallowness of financial markets, relatively less flexible interest rates on deposit and loan products, and fiscal accommodation by monetary policy at times are identified as reasons for weak transmission.