Growth Effects of Fiscal Deficits in Sri Lanka

Mayandy Kesavarajah

doi:10.4038/ss.v47i1.4702

Abstract

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.

Highlights

It is well established in the macroeconomic literatures that maintaining macroeconomic stability is an essential prerequisite for robust and sustainable economic growth
This section investigates the direct impact of fiscal deficits on economic growth in Sri Lanka covering the period 1970-2015, employing annual time series data published in the various annual reports of the Central bank of Sri Lanka
This paper examined the impact of fiscal deficits on growth in the small open economy of Sri Lanka over the period 1970 to 2015

Summary

Introduction

It is well established in the macroeconomic literatures that maintaining macroeconomic stability is an essential prerequisite for robust and sustainable economic growth. Policy uncertainty created by macroeconomic instability affects growth through the volatility of returns on investment and misallocation of resources as price signals become distorted (Fischer, 1993; and Fatas & Mihov, 2013). The instruments of fiscal policy are widely used to maintain price stability and achieve better financial management (Jayasundara, 1986), the persistently increasing high levels of fiscal deficit have created several repercussions for maintaining macroeconomic stability and emphasised the importance of managing fiscal sustainability in the economies. In the aftermath of the global financial crisis, many countries engaged in fiscal and monetary stimuli to revive their economies. In order to revive the economy, the central banks sharply lowered policy rates, several of them to zero

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Conclusion