Financial Development and Economic Growth: The Evidence of Sri Lanka

Abstract

Individual countries, and panels of countries have been studied the association between financial development and economic growth using different methodologies. There are three kinds of results — first one unidirectional relationship second one bidirectional relationship and third one no relationship at all. Studies of Sri Lanka have insufficient; there has a different idea of conclusions and one unique method they have applied the papers. The purpose of the paper is to realize the relationship between financial development and economic growth in Sri Lanka. The annual data sets are used in 1947 to 2016 period of the Sri Lankan economy. This thesis has ten variables which can be obtained from the Central Bank Reports of Sri Lanka from 1950 to 2016. In this thesis, unit root test, the vector error correction model (VECM) and the Chow test method are used to perform the tasks. In between short and long-term decisions, it can be used VECM and, eventually, by economic or political policy changes or unexpected economic shocks, can be used chow tests. The study found that the causal relationship between Money Supply (M2), Loan (LOAN), Investment (INVEST), Government Debt (GD), Current Account Balance (CAB), Consumer Price Index (CPI), Average Weight Deposit Rate (AWDR) to the Gross Domestic Product (GDP) . There are no short-term causal relationship from Loans (loans), Government Debt (GD), Current account balances (CAB), Consumer Price Indices (CPI) and Average Weight Deposit Rate to the Gross Domestic Product. The conclusion of the objective reaffirms that M2 and economic stability are of great importance in Sri Lanka. The factors that affect Sri Lanka's long-term financial development and economic growth are then identified. Developing Sri Lanka as a Financial Center, it will be a catalyst for economic growth and greater international trade. So, involvement Financial Center and Port City, Sri Lanka can be maximized their economic growth and financial development.