In this seminar Yashodha will provide an overview of her recent paper, Terms of trade and the Sri Lankan economy: A sign-restricted VAR approach.

The deteriorating terms of trade in the past two decades has been a concern for the policy-makers of Sri Lanka. Recent literature has argued that the effect of terms of trade on an economy depends on the characteristics of the underlying shock. Hence, Yashodha’s presentation examines the impact of external shocks, which cause terms of trade fluctuations, on the Sri Lankan economy using a sign restricted Vector Auto-Regression (VAR) model. Three external shocks, viz., world demand shocks, world supply shocks and globalization shocks have been considered in Yashodha’s study. World demand shocks do not have a significant long-term effect on Sri Lanka’s real output, but negative world supply shocks are contractionary. Conversely, positive globalization shocks increase domestic output permanently. Both positive world demand shocks and globalization shocks are inflationary while negative world supply shocks increase domestic prices initially but reduce the price levels after two quarters. World demand shocks have largely contributed to the fluctuations in trade balance since 2007, whereas the importance of globalization shocks on the imports, exports and trade balance has increased since 2010. Yashodha concludes that the contribution from globalization shocks to the variance in domestic output and price levels has increased since 2007.

Yashodha Warunie Senadheera is a third year PhD student at Crawford School. She completed her Masters and Graduate Diploma in International and Development Economics at ANU in 2013. She is an Associate Member of the Chartered Institute of Management Accountants, UK and has worked as a fund manager at the Central Bank of Sri Lanka. Her research interest is on monetary economics.

The CAMA Macroeconomics Brown Bag Seminars offer CAMA speakers, in particular PhD students, an opportunity to present their work in progress in front of their peers, and reputable visitors to showcase their work.