Abstract
There are several reasons why the dynamic interaction between FDI and inflation must be studied. First, Foreign Direct Investment is found as one of the important determinants of the process of economic growth and development of Sri Lanka. Therefore, the literature empirically examining the causal relationship between the inflation and FDI is significant because the rate of high inflation affects the inflows of FDI inflows into the economy of Sri Lanka and slows down the process of economic growth and development. The main objective of this study is to examine the linkages between FDI and inflation in Sri Lanka for the time periods from year 1978 to year 2017. The dependent variable of the model used in this study is Inflation and the independent variable of the model is FDI (Foreign Direct Investment). The data used in the model are the annual time series collected from Annual Report of Central Bank of Sri Lanka. The tools to analyze the data are graphical representation, Johansen Co-integration test, simple regression model, Residual Analysis, Stability Test, and Granger Causality Test. A long run relationship is found between the variables. The dependent variable: INF – Inflation is inversely related with the independent variable: FDI – Foreign Direct Investment. One-way causal relationship from FDI to INF is ensured. The forecast sample is ranged from 2009 to 2017. The simple regression model affirms the significant impacts of the FDI – Foreign Direct Investment on the INF – Inflation. The forecasting model derived from the simple regression model is rather incompatible to forecast the value of dependent variable (Inflation).
Highlights
Foreign Direct Investment (FDI) has reached historical milestone during past three decades and it has become significant aspect in the developing world
The literature empirically examining the causal relationship between the inflation and FDI is significant because the rate of high inflation affects the inflows of FDI inflows into the economy of Sri Lanka and slows down the process of economic growth and development
Based on the value of coefficient of independent variable in this simple regression model, one percent increase in the foreign direct investment leads to decrease the inflation by 0.10 percent, otherwise one percent decrease in the foreign direct investment leads to increase the inflation by 0.10 percent
Summary
Foreign Direct Investment (FDI) has reached historical milestone during past three decades and it has become significant aspect in the developing world. A growing number of developing countries are succeeding in attracting substantial and rising amounts of inward FDI In both developed and developing countries, policy makers pay attention to achieve high sustainable economic growth with low inflation and it is used as a poverty reduction strategy (Khan and Senhadji, 2001).The rate of low inflationary pressure is considered as a symptom of economic stability found internally in the host country. It is found as one of the macroeconomic indicator which is used to measure the macroeconomic stability. The capital available at cheaper rate of interest and the domestic consumption which is higher in the host country due to the lower price levels leads to attract Foreign Direct Investment to stimulate economic growth and development
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