Money supply, inflation and economic growth of Sri Lanka: co-integration and causality analysis

Abstract

PurposeGDP growth, money growth and inflation are essential to an economy's macroeconomic stability and have a direct impact on the policymaking process. Sri Lanka is currently concerned about high inflation. Inflation is a monetary phenomenon. Inflation has been caused by monetary policy in several nations. According to the economic theories of Karl Marx, Irving Fisher and Milton Friedman, a continuous increase in the money supply causes inflation. This paper aims to investigate the relationship between Sri Lanka's GDP growth, money growth and inflation.Design/methodology/approachAn econometric model and the economic theories of Fisher and Friedman are used to figure out how money supply, inflation and economic growth are linked. Between 1990 and 2021, data were gathered from secondary sources.FindingsThe increase in the money supply is found to cause inflation. Inflation has negative effects on both short- and long-term economic growth. Long-term, the increase in money supply has a negative effect on economic growth.Research limitations/implicationsAccording to research, the money supply and inflation are inextricably linked, and the money supply has a direct impact on economic growth. As a result, the government should have an appropriate monetary policy and proposals to control inflation levels and stimulate economic growth.Originality/valueThe paper adds to the existing literature in two ways. First, it fills in the lack of studies in Sri Lanka, where there are no papers on this important relationship, especially with a modern econometric study. Second, it tries to shed light on the asymmetric shocks (both positive and negative shocks and changes) between the three variables, which was not done in previous studies.