Inflation and economic growth: a case study of Sri Lanka

Abstract

This paper examines two policy views in economic literature on the relationship between inflation and economic growth. Monetary policy practitioners are o f the view that inflation is detrimental to economic growth while structuralists believe that moderate inflation can contribute to economic growth. Therefore, the main objective o f this paper is to examine empirically this controversial issue for Sri Lanka. This is tested using a cointegration analysis, Granger Causality Test (GCT), and Generalized Impulse Response Analysis (GIRA). The GCT is carried out to determine the direction as well as the degree o f causality between the two macroeconomic variables concerned in the study. GIRA is used to confirm the pattern o f volatility transmissions across inflation and economic growth, as empirical studies are still ambiguous about the fact that price stability brings output losses in the short run. The paper employs annual data from 1960 to 2005 for the current research.