Inflation Targeting & Central Bank Independence - New Directions for Sri Lanka's Monetary Policy?

The growing consensus that the design of scientific monetary policy requires targets or rules rather than discretion is explained in the paper, using a macro-theoretic framework. A quadratic loss function constrained by a an expectations augmented Phillips curve has been used to demonstrate that an optimal policy rule connoting inflation targeting delivers superior or low inflation outcomes than under discretionary policy. It is argued that the adoption of the institutional framework of Inflation Targeting and Central Bank Independence could free monetary policy from the destabilising effects of the political business cycle and galvanise it to face the challenges of globalisation