This study examines whether there is empirical evidence that Wagner's law holds in the Sri Lankan economy using time series annual data over the period from 1960 to 2010 for Sri Lanka, applying cointegration and error correction modeling (ECM) techniques. In particular, this study keeps a special focus to examine the validity of six versions of Wagner's hypothesis, which support the existence of long-run relationship between public expenditure and economic growth. The empirical evidence of this study indicates that while there prevail is a short-run relationship between public expenditure and economic growth, the longrun results showed no strong evidence in support of the validity of the Wagner's law for Sri Lankan economy. Granger causality analysis also confirms this result. Therefore, the findings of this study pave to broaden this study further for a deeper understanding about the relationship between public expenditure and economic growth by giving more attention on individual items of public expenditure and by including more macroeconomic variables in the econometric model using different methodology in future.
The role of taxation in determining output growth has been at the centre stage of debate amongst economists, policy makers and researchers over the period. One of the major areas that was more vigorously debated in the field of public finance is whether the changes in tax composition are matters for output growth in the long term. On the empirical front, less conclusive results have been highlighted in the literature. The purpose of this study is to estimate the effects of revenue-neutral tax structure changes on long term economic growth in Sri Lanka within the framework of an endogenous growth model using time series annual data over the period 1980 to 2013. The empirical results of this study indicated while there is an unidirectional causality which is running from income taxes, value added tax and international taxes to output growth, the excise taxes and other taxes are caused by output growth. The study also found negative and statistically significant impacts of income taxes and other taxes on growth. This reflects, apart from income taxes, other taxes which are taxes on other economic activities has hindered the long term growth. Hence, the only robust result appears to be that shifts in tax revenue towards consumption taxes are associated with faster growth.
This study estimates the forward-looking monetary policy reaction function for SriLanka using monthly data from 1980 to 2017. The results indicate that the CentralBank of Sri Lanka (CBSL) followed the Taylor rule to set interest rates. Our forwardlookingmodel estimations show that the coefficient on inflation increases over time,reflecting the greater focus on price stability by the bank. The results suggest that theCBSL reacted to nominal exchange rate depreciation by tightening monetary policy.Although the degree of interest rate smoothness gradually decreases over time, thestudy shows that the CBSL did not react to movements in fiscal deficit during theperiod under investigation. This finding suggests that the inclusion of fiscal deficit inthe Taylor rule does not provide a better specification of the policy reaction functionin Sri Lanka.
This study examines the economic growth effects of fiscal deficits in the light of policy debates on the
This paper examines the impact of monetary policy on the inflation-output variability trade-off for Sri Lanka, drawing monetary policy lessons for developing economies. We examine how this trade-off has changed across different monetary policy episodes, and investigate the persistence of the variability of inflation and output after supply and demand shocks. Finally we explore the contribution of monetary policy to macroeconomic performance more generally. Learning from the experience of Sri Lanka, our findings suggest that more recently formed central banks should focus on inflation variability, especially where the impact of demand and supply shocks are less persistent.
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