Effectiveness of the Traditional Interest Rate Channel to Achieve Core Objectives of Monetary Policy in Sri Lanka

Abstract

The study examines whether the interest rate channel serves well as the major monetary policy transmission channel to maintain monetary policy core objectives in the Sri Lankan context. Monetary policy innovations, are transmitted to the macro economic variables through several transmission channels, and the traditional interest rate channel was identified as the way that transmits the monetary policy shocks to the price level and output through firms' business decisions on investment. The study uses quantitative techniques for the analysis, and the data has been collected for the period of 1978 to 2014. The Johansen Co-integration technique is employed for analysis due to the nonstationarity of all the series used in the study.