Essays on the Role of a Central Bank: Financial Stability, the Domestic Transmission Mechanism, and International Policy Transmission
Creators: name: Jayasekara Arachchige, Dhanushka
Publisher: name: University of the Sunshine Coast, Queensland
Year: 2025
Subjects: subject: Taylor rule
subject: interest rate smoothing
subject: financial stability
subject: Generalized Methods of Moments
subject: monetary policy transmission mechanism
subject: Structural Vector Auto regression
subject: spillovers
subject: impulse reponse functions
subject: variance decomposition
subject: Applied economics
subject: Econometrics
subject: FOS: Economics and business
subject: Economic theory

description: Given that this century has seen additional challenges to monetary policy makers arising from the GFC and COVID-19, it has therefore become timely to re-examine monetary policy operations, the effectiveness of the transmission mechanism, both within and between countries, and the relationship between monetary policy and financial stability. This thesis aims to provide a comprehensive analysis of several important topics in contemporary monetary policy. Its first chapter outlines the problems tackled by each of the three subsequent empirical chapters.
description: In probing the efficacy of monetary policy in Sri Lanka, the second chapter of this thesis investigates the augmented forward-looking Taylor rule’s application and implications. Prompted by debates on the conventional policy framework’s adequacy for financial stability amid evolving economic dynamics, our focus is on analysing the Central Bank of Sri Lanka’s (CBSL) adherence to a forward-looking Taylor rule, incorporating variables such as the exchange rate gap, the asset price gap, and the credit gap, alongside standard objectives. Employing the Generalised Method of Moments (GMM) and quarterly data from 1988 Q1 to 2022 Q4, the second chapter finds that while the CBSL aligns with a forward-looking Taylor rule, its policy predominantly emphasizes inflation targeting, with limited influence from additional variables such as the exchange rate gap, credit gap and asset price gap. The predominant policy emphasis remains inflation targeting, characterized by a commitment to interest rate smoothing. This study not only elucidates Sri Lanka’s monetary policy intricacies but also contributes to ongoing discussions about traditional frameworks addressing contemporary financial stability challenges.
description: The third chapter of this thesis examines the effectiveness of the monetary policy transmission mechanism in the context of advanced economies using the example of Australia. The study provides estimates of the speed and the magnitude of the transmission of policy changes to the target variables of inflation and output, and the relative importance of each monetary policy transmission channels. The analysis uses quarterly data from 1990 to 2022 and employs a Structural Vector Auto Regression (SVAR) model. We use nine endogenous variables to estimate an open-economy SVAR model by imposing short-run restrictions based on contemporaneous relationships and economic theory. We find that monetary policy in Australia is more effective with respect to GDP than inflation. The estimated results are consistent with the existing literature; however, the magnitutes of the impacts of monetary policy on the target variables are different compared to previous empirical analyses of Australian monetary policy.
description: The fourth chapter of the thesis addresses the question of how the monetary policy operations of advanced economies affect EMEs via the international monetary policy transmission mechanism. We analyse the impact of US monetary policy on the two leading EMEs, China and India. The empirical work of this paper also uses the SVAR method for the sample period of Q1:2000 to Q4:2023. The estimated results demonstrate that the two countries have different responses to US monetary policy tightening. We highlight the significant difference in terms of the response of the short-term interest rates of each country to US monetary policy tightening. Compared to China, India exhibits a stronger response to US monetary policy tightening.