MONEY SUPPLY AND ECONOMIC GROWTH IN SRI LANKA (An Empirical Re - Examination of Monetarist Concept)

Outline of Presentation Introduction Objective of the study Methodology Findings and Discussion Conclusions

Introduction In the modern economy, money supply is identified as a very importance tool to accelerate the economic development of nations. Monetarists economists also argue that the money supply influences on economic growth of countries. The money supply means that the total amount of monetary assets available in an economy Economic growth means percentage increase in gross domestic product from year to year basis. According to the monetarist concept, the relationship between the money supply and economic growth is a researchable question in Sri Lanka, because there is no research regarding this relationship.

Objective of this Study The objective of this study is to re – examine the relationship between the money supply and economic growth of Sri Lanka.

Methodology In this study, the gross domestic product and money supply are considered as the variables The gross domestic product was considered as the dependent variable. The money supply was deemed as the independent variable. The data for the variables were collected from the annual reports of Central Bank from the period of 1959 to 2013

Methodology To test the stationarity of the variables, ADF test was used in this study. The cointegration technique, the ECM and causality analysis were employed to test the relationship between the money supply and the economic growth of Sri Lanka

Findings and Discussions Based on the ADF test statistic, the money supply and the gross domestic product are stationary at 5% significant level in level form. The estimated regression model is as follows:

Findings and Discussions The partial coefficient of independent variable (money supply) is 1.47 and its ‘t’ statistic is with p value The R – squared of the estimated model is 85% and its Durbin Watson test statistic is (R – squared > DW). The money supply and the gross domestic product are cointegrated at level I(0) form. When the residuals of estimated model are tested on the stationarity, it is stationary at 5% significant level.

Findings and Discussions To test the short run behavior of the money supply with the GDP, the Error Correction Mechanism (ECM) is used, The ‘F’ statistic of estimated model is with p value 0.000, therefore this model is adequate. The adjustment coefficient of the ECM model is (-0.29), Therefore the ECM model is stationary at 5% significant level. Hence, the money supply causes the GDP and the GDP causes the money supply. This is proved by the Granger causality test statistics.

Concussion This study found that there was a positive relationship between the money supply and economic growth of Sri Lanka in the short and long run. Therefore, this study proved and reconfirmed the monetarist concept of the relationship between the money supply and the gross domestic product.

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