Abstract
The objective of this study is to identify the short and long-run determinants of inflation in Sri Lanka. It follows an eclectic approach to seeking possible determinants of inflation and employs an Autoregressive Distributed Lag (ARDL) bounds testing approach to test for co integration between inflation and its causes. The findings indicate that increased money supply, depreciation of the rupee and higher public wages are the major causes of inflation in both the short and long-run. Thus, it can be stated that inflation in Sri Lanka is affected by both demand and supply side factors, which highlights the importance of a prudent and effective implementation of the monetary and fiscal policies so as to ensure a stable macroeconomic environment in Sri Lanka.
Highlights
Inflation, which is commonly defined as a persistent increase in the general price level over a long period of time, is considered to be one of the most researched topics in economics
Where Pt is price level represented by the Colombo Consumers’ Price Index; Mt is nominal broad money supply (i.e. M2); Et is nominal exchange rate between the Sri Lankan rupee and the US dollar; OPt is average price of a barrel of crude oil in US dollar terms; BDt is annual budget deficit of government fiscal operations; Yt is real gross domestic product; WtS is nominal public wage index; WtP is nominal private wage index; D01 is a dummy to capture the impact of the power crisis in 2001; D04 is a dummy to capture the impact of the tsunami disaster in 2004
This study inquired into the short-run and long-run determinants of inflation in Sri Lanka, using annual data for the period from 1977 to 2014
Summary
Inflation, which is commonly defined as a persistent increase in the general price level over a long period of time, is considered to be one of the most researched topics in economics. Weerasekara (1992) posits that money supply growth and depreciation of the exchange rate are the main determinants of inflation in Sri Lanka.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
