Vol 2, No 3 (2014)
Dynamic Feedback between Money Supply, Exchange Rates and Inflation in Sri Lanka
O. G. Dayaratna-Banda, R. C. P. Padmasiri
Abstract
Macroeconomic theory postulates possible feedback between money growth, exchange rates and inflation. Empirical evidence derived, however, from various countries is mixed. While some finds strong feedback relationships in some countries, others find weak feedback. As there is dearth of empirical studies on this with reference to the case Sri Lanka, this paper examined long run dynamic feedback between money growth, exchange rates and inflation in Sri Lanka by using the Auto Regression Distributed Lag Model approach to cointegration. Possible short run dynamics were examined by using error correction model. The results are mixed. Monetary expansions have not lead to inflation during the period of estimation possibly because monetary expansions have been accommodated by capital inflows for foreign borrowing. Results also show that shocks in exchange rates lead to inflation in both short run and long run. Increase foreign prices lead to increase in inflation rate only in the short run. The results are useful for monetary policy makers for macroeconomic management in a small open economy like Sri Lanka.
Full text: 
PDF
Keywords
Money Supply, Inflation, Exchange Rates, ARDL
Publication information
Volume 2, Issue 3
Year of Publication: 2014
ISSN: 1857 - 8721
Publisher: EDNOTERA
How to cite
Dayaratna-Banda, O. G., Padmasiri, R. C. P. (2014). Dynamic Feedback between Money Supply, Exchange Rates and Inflation in Sri Lanka. Journal of Applied Economics and Business, Vol 2, No. 3, 41-54.