The Causal Relationship between Inflation and Economic Growth: An Empirical Study in Sri Lanka

Many studies test the relationship between inflation and Economic growth in several countries. This study aims to find long run causal relationship between the inflation and economic growth in Sri Lanka over the period from 1960 to 2015 using annual data. Johansen co-integration technique and Vector Error Correction Model (VECM) are used to investigate the relationships. The empirical results confirm a bidirectional causality between the inflation and Economic growth. However, it finds that there is no short run causality between inflation and economic growth. The result may be useful for monetary decision makers and development partners in the sense to keep inflation rate in appropriate level.