Abstract:
Three major economic indicators such as Inflation, unemployment and interest rate have an
important role in an economy in terms of sustainable development. The long-term progress of
the Sri Lankan economy is destabilized. The linkage or the impact among these variables is
very important for developing country such as Sri Lanka to overcome the destabilized hurdles.
The study intends to investigate the impact of unemployment and interest rate on inflation in
Sri Lanka. Also, this study was analyzed the short and long run relationship among the
variables. Phillip’s relationship between the variables inflation and unemployment also was
discussed in details. Fifty-three years of annual data for period of 1953- 2015 of the variables
inflation, unemployment, interest rate, money supply (M2) and government expenditure used
for the analysis. Parametric and non-parametric approaches have been employed in this study.
The Autoregressive Distributed Lag (ARDL) model with co-integration technique has been
employed to find the short and long run relationship of the variable. The statistical package
EViews 9 and Microsoft excel were used for the analysis. The study reveals that unemployment
is negatively impact on inflation in short and long run in Sri Lanka, which is statistically
significance. Further, the study revealed that the Phillip’s relationship between inflation and
unemployment exist in Sri Lankan economy. The interest rate is also negatively impact on
inflation in short run and positively impact in long run. Results are statistically significance at
5% confidence level and theoretically expected. This study recommends that the relationship
between the variables should be noted and utilized the Engine of growth concept in order to
achieve sustainable development of Sri Lanka. Job opportunities to be extended further more.
Further, the study suggests that using quarterly data to analysis this kind of time series will
reflect relationship accurate.
