Abstract:
This paper examines the long-run relationship between financial development and economic growth. The effective function of financial
development is crucial to promote the economic development of the country. To achieve the objective, this study used Gross Domestic
Product as a dependent variable and Credit to The Private Sector, Ratio of the Gross Fixed Capital Formation to GDP, Trade, Consumer
Price Index and Labour Force as an independent variable. Augmented Dickey-Fuller test statistic (ADF) to check the stationary. Bounds test
for cointegration and Auto-Regressive Distributed Lag Models (ARDL) are used to check cointegrating relationship amongst the variables
and causality between financial development and economic growth. Moreover, the Model selection method is Akaike Info Criterion (AIC).
This result demonstrates that the labor force and trade hold a significantly negative relationship with economic growth. Nevertheless,
inflation, Credit to The Private Sector, and Ratio of the Gross Fixed Capital Formation to GDP show a significantly positive relationship
with economic growth. Therefore, there is a statistically significant relationship between Financial Development and Economic growth in
Sri Lanka and the Sri Lankan government should reform its trade policies.
