Abstract
This study investigates the relationship between financial development and economic growth of Sri Lanka using time series data from 1960 to 2008. Cointegration and causality tests are conducted to assess the finance-growth link by taking saving, investment, trade and real interest rate into account. The empirical results show that economic growth causes financial development in the long-run and there is no reverse causation. This conclusion of the study goes in line with the views expressed by Demetriades and Hussein (1996), Macri and Sinha (2001) and Abma and Fase (2003) but departs distinctively from the observations made by Ahmed and Ansari (1998), on the finance-growth link in relation to Sri Lanka. The results of this research also show that the investment causes the economic growth which in turn results in demand for financial services to follow the growth in the real sector of the economy. This study has further identified that Sri Lanka’s financial system has shown some weaknesses in performing its tasks which would have been instrumental in the determination of causality pattern between financial sector development and economic growth of the country.
DOI: http://dx.doi.org/10.4038/ss.v40i1.4679
Staff Studies – Volume 40 Numbers 1 & 2, 1-36
© 2012 H Amarathunga, published by Central Bank of Sri Lanka
This work is licensed under the Creative Commons License.