The Fiscal and the Monetary Policy Coordination in Sri Lanka: An Empirical Study from 1960 to 2018

Abstract

The Fiscal and the Monetary policy are playing an energetic role to achieve the macroeconomic goals through sustainable growth and internal, external price stability which are the primary objective of the economy. The awareness of the coordination between the monetary and fiscal policy has been increased after the financial crisis in 2008. This study try to examine the Fiscal and monetary policy existing coordination in Sri Lanka in between 1960 to 2018. This empirical study confirms the lack of coordination through the independence tests. To test the causality, the Granger Causality test has been used by E-Views. Also to measure the extent of Coordination between different shocks of the Growth rate and Inflation rate in macroeconomic environment, this study constructs matrices called Macroeconomic Environment Matrix and Policy Stance Matrix. The results indicate from 1960 to 2018 there is a lack of coordination between the monetary and the fiscal policies. The extent of coordination in Sri Lanka has grasped 0.345. Between 1960 to 2018, existing coordination prevails only in 20 years in this research. The conclusion derived from this study is that, there is 34. % of esentiatial preparations were made by the related authorities which guarantee the decision occupied by authorities are not conflicting in past from 1960 to 2018. Moreover this study suggests that the government should implement some policies to enhance the well coordination between the fiscal and the monetary policy and fiscal policy through the proper institutional and operational arrangements improve institutional and operational arrangements towards enhancing well coordination of both policies.