Demand-Driven Factors of Inflation in Sri Lanka: An ARDL Approach

Inflation in Sri Lanka has been one of the country’s major macroeconomic issues, especially since 1977. Inflation in Sri Lanka has been caused due to various factors. The present study analyses the demand-driven factors of inflation in Sri Lanka. The time-series data is used to identify such factors, applying the ARDL technique to determine the long-run and short-run relationships during the 1977-2019 sampling period. X. The demand-driven long-run factors were real GDP, fiscal deficit, 91-days treasury bills rate, and broad money supply. On the other hand, short-run factors were real GDP, imports, budgetary deficit, broad money supply, wages of the private sector and wages of the government sector.  The findings suggest that both long-run and short-run determinants impact inflation in Sri Lanka. As such, real GDP, fiscal deficit, Treasury bill rate, and broad money supply explain the inflation in Sri Lanka in the long run. Real GDP has a significant impact on inflation in the long run than the treasury bills rate. In addition, wages of the private sector and wages of the government sector also significantly impact inflation in Sri Lanka. The findings would be helpful for policymakers in their efforts to control the country’s inflation by maintaining the price stability in Sri Lanka sustainably.