Abstract:
Nowadays, number of researchers empirically confirmed that the inflation and economic
growth equally move together in negative liaison. But, in Sri Lankan context, this
relationship was inferentially not proofed. Therefore, this study was empirically going to test
this relationship. The objective of this study was to test the long run nexus between the
inflation and economic growth in Sri Lanka. To test this objective, this study used the annual
time series data during the periods of 1970 to 2014. And, the multiple regressions model was
employed with support of the Auto Regressive Distributed Lag (ARDL) technique which
was newly introduced by Pesaran et al., (2001). In this study, the economic growth was used
as dependent variable and the inflation rate, exchange rate, and money supply were
considered as independent variables. In these independent variables, the inflation rate was
considered as key variable and others were exercised as control variables. Based on the
ARDL technique, this study selected the lag- 2 model for interpreting the findings which
was selected by Akaike Info Criterion (AIC) and Schwarz Bayesian Criterion (SBC).
Furthermore, this study fitted a long run nexus model using ordinary least square method
with support of ARDL technique. Based on this model, this study confirmed that both the
inflation and the economic growth maintain the long run nexus between them with
appearing of negative sign. Therefore, this study recommends that, when the development
policy makers frame the development policy they should consider this nexus.
