The relationship between money stock and economic growth of Sri Lanka: an aeg testing approach

Abstract

In modern economy, money stocky is identified as a mechanism of economic growth of all nations. The purpose of this study was to test the relationship among the money stocky and economic growth of Sri Lanka. The time series data of the gross domestic product and the money stockused in this study were collected from the sample period from 1959 to 2013. The Augmented Dickey Fuller (ADF) and Philips Perron tests were used to test the stationarity of the time series variables, and then the Augmented Engel – Granger (AEG) testing approach was employed to test the relationship between the variables. Based on the Augmented Engel – Granger (AEG) testingresults, this study found that the money stock was positively impacting on economic growth of Sri Lanka. The partial p – Value of the money stock was less than 1% and the value of R- squared of this testing model was 0.85, which was higher than Durbin Watson statistic. In the meantime, the absolute value of the Augmented Dickey Fuller (ADF) test of the residual of the estimated model was stationary at 5% critical value. So, the conclusion was that the money stock and economic growth of Sri Lanka were maintained the relationship between them at I(0) level form.