Evolution of Monetary and Exchange Rate Policy in Sri Lanka and the Way Forward by  Dr. P. Nandalal Weerasinghe1 Senior Deputy Governor Central Bank of Sri Lanka  I am deeply honoured to have been invited to deliver the Olcott Oration 2017 and to join a list of great Anandians who have delivered this Oration before. I cannot think of a greater honour that my school could confer on me. I accepted this invitation with humbleness, with gratitude and respect, and with great pride. Let me also take this opportunity to appreciate the support and guidance I received during my school career at Ananda College. The guidance our teachers gave us laid the foundation for any success later on in our lives. My oration today, is on the rather technical topic of monetary and exchange rate policy. The biggest challenge that I have to face is to present such a topic to an audience with a majority who might not be familiar with the technical jargon involved. However, I will attempt to keep the discussion as simple as possible. Central Banking and Price Stability The prime responsibility of any central bank around the world is to maintain price stability by way of maintaining low and stable inflation on a sustainable basis. At the outset, I would like to discuss why low and stable inflation is important for growth and stability of the economy. Based on experiences of many countries and different time periods, we have seen varying levels of inflation.
As such they are to be welcomed. However, if not fully understood at the micro level and not fully taken into consideration at a macro level, they may imply some unexpected adverse implications in terms of market dynamics. 1.3. Several avenues are being explored to mitigate financial instability  Strengthening the continuing efforts aiming at market transparency is one of the main avenue for future action. Experience shows that uncertainty and incomplete information are determining factors in mimetic behaviour. One of the objectives of transparency is to better differentiate borrower creditworthiness. A key feature of mimetic behaviour is that all borrowers are ‘tarred with the same brush’. So when one firm or one business sector face difficulties, neighbouring businesses or sectors are treated in the same way regardless of their actual economic and financial situation. The same may apply between emerging market economies as we shall see later. A careful examination of financial supervision rules and regulation, accounting standards, codes of good conducts, market practices and financial engineering seems also necessary to better understand their possible impact on market dynamics. There is a major public interest in trying to identify the elements that are pro-cyclical and those which are anti-cyclical. Financial authorities and market participants should commit to mitigate progressively, or possibly suppress, those elements of standards, regulations or financial techniques that are strongly pro-cyclical and, in the meantime, to reinforce the elements that could potentially counter the boom-bust tendencies.