Abstract:
This study examines the causal relationship between the balance of payment and money supply in the
context of Sri Lanka using annual data from Sri Lanka from 1977 to 2019. The data on the balance of
payment (BOP), money supply (MS), gross domestic product (GDP), inflation (INF), and
government expenditure (GE) were collected from the world development indicator and annual
reports of the central bank of Sri Lanka. Granger causality test was adopted to examine the causality
among variables. It reveals that uni-directional causality exists from MS to BOP. This conclusion
emphasizes that reducing the deficit of BOP in Sri Lanka and MS could be used as a policy
instrument
