MANAGING VULNERABILITIES TO SUSTAIN strongSTABILITYstrong.pdfVIP

MANAGING VULNERABILITIES TO SUSTAIN STABILITY Action by the Central Bank Dr. W M Hemachandra Assistant Governor Central Bank of Sri Lanka Abstract This paper deals with the role of the central bank in achieving stability in an economy, particularly the financial sector. The study discusses the policy measures that the Central Bank of Sri Lanka implemented during 2007-2011 to achieve stability of the macro economic parameters of the economy while highlighting the nexus to theoretical approach. Later, the study discusses the outcome of the stability measures implemented by the Central Bank with an emphasis on maintaining price, economic and financial system stability which is the main objective of the Central Bank of Sri Lanka. 1.0 Introduction Managing economic stability is a subject coming under social sciences. Economic stability refers to an absence to excessive fluctuations in the macro economy. An economy with a fairly constant output growth and a low and stable inflation would be considered economically stable. If there are recessions, business cycles, variable inflation or frequent financial crises it can be considered as economically unstable. One of the objectives of central banks around the world is to maintain economic and price stability. Economic stability would create an environment which is conducive for maintaining favourable living standards. Economic stability will provide grounds for social and political stability too. A central bank is one of the entities available in an economy to maintain economic stability. Central banks in collaboration with other regulators implement different policies in order to achieve its stability objectives. In order to maintain economic and price stability, countries have monetary polic