An analysis of political instability and macroeconomic mechanism in Sri Lanka : empirical study from 1980 to 2018.

Abstract

Political instability is regarded by economists as a serious discontent harmful problem to economic performance. It is creating major problems & hindering the development in Developing countries. Likewise, Political Instability is becoming continues to threaten Economic history in Sri Lanka. Therefore, this study tries to identify the Political instability effect on the economic growth in Sri Lanka from 1980 to 2018. The specified indicators had been analyzed by the method of Ordinary Least Squares (OLS). In this multiple regression model, GDP at current market price is the dependent variable. Independent variables are the Political Stability Index, Economic Freedom Index, Investment Ratio, and Gross Fixed Capital Formation. This study proves that the estimated coefficient value shows that Political Stability has a positive significant impact on Economic Growth. In contrast to this our descriptive analysis finds out that through the years the political stability index has mostly the negative value which indicates the instability in the political system of Sri Lanka. This cause various direct and indirect impact on the economy. Therefore, it concludes that creating political stabilization will enhance economic growth. At the same time political stabilization positively correlated with investment and fixed capital formation. According to the results, this study suggests some recommendations for Policy implementation to sustain the macroeconomic goals through strengthen Political stability in Sri Lanka.