EXOGENOUS SHOCKS AND MACROECONOMIC POLICIES IN LDCS - A STUDY OF SRI-LANKA WITH AN ECONOMETRIC-MODEL

The main objectives of this paper are to analyze the impact of exogeno us shocks on an economy with a strong primary commodity producing sect or and underdeveloped financial and capital markets, and to present so me of the macroeconomic policies that might be employed to stabilize t he domestic economy in response to exogenous shocks, using an economet ric model of Sri Lanka. An analysis of the impact of export price shoc ks on the Sri Lankan economy reveals that the sectorial adjustment mec hanism and the impact on the economy are different in response to chan ges in the international price of each sector. However, in all cases t he impact of external shocks is strongly felt in the monetary sector a nd the external sector. An analysis of active policies under different types of extemal price shocks indicates that the possibility of effec tive use of macroeconomic policies to offset the detrimental impact of extemal price shocks is constrained by the lack of independence of mo netary policy, by the embryonic nature of the capital and financial ma rkets and by limited access to foreign finance.