Abstract:
The main objective of the study is to investigate the empirical relationship between
macroeconomic variables and real gross domestic product (GDP) in Sri Lanka.
Exchange rate, government spending, interest rate, money supply and unemployment
rate were considered as selected macroeconomic variables. real GDP was considered
as a dependent variable. The current study used annual time series data over the period
from 1990 to 2019 which were collected from the annual reports of the Central Bank of
Sri Lanka. Stationary of the data was tested using the Augmented Dickey-Fuller test.
Johansen co-integration rank test, max Eigen value test, Vector Error Correction along
with Wald causality test were used to estimate the relationship between macroeconomic
variables and GDP. At the 5% level of significance, the co-integration rank test and
max Eigen value test revealed that there are four co-integration equations exist in this
study. Therefore, it was concluded that selected macroeconomic variables have long run impact on GDP. Likewise VEC and Wald test revealed that the all the selected
macroeconomic variables causes GDP in the short run. The results support the
theoretical prediction that macroeconomic variables would play an active role in GDP.
The study, therefore, concludes that macroeconomic variables are driving GDP in Sri
Lanka. Thus, growth-oriented macroeconomic policies should be established for
protecting poor people in the country.
