Impact of Consumer Price Index and Gross Domestic Saving on Economic Growth in Sri Lanka: An Econometric Analysis Using Johansen Co-Integration Approach

Abstract

An essential goal for any developing country like Sri Lanka is to attain high economic growth. Although there are many factors that affect economic growth (GDP), this paper mainly focuses on Consumer Price Index (CPI) and Gross Domestic Saving (GDS) in Sri Lanka, based on the annual time series data for the period of 1960 - 2016 obtained from the Annual Report of World Bank Economic Indicators and Annual Report of Central Bank of Sri Lanka. The Augmented Dickey Fuller unit root test was employed to check the stationarity among the three variables (GDP, CPI, and GDS). The existence of cointegration of the variables was ensured by the Johansen Co-integration test and then the short-run or long-run association among the variables was assessed by Vector Error Correction (VEC) test. The causal relationships among the variables were checked using Granger Causality test. The empirical findings of this study reveal that all the variables have unit root problem at level, but become stationary after first differencing. The results of Johansen Co-integration tests indicate one co-integration equation while the VEC test recommends no short-run relationship among the variables whereas the existence of a long-run relationship. Correspondingly Granger causality test exhibits a unidirectional causality movement from GDP to GDS. Model adequacy tests were implemented on the residuals of the VECM remarks that there is no heteroscedasticity, no serial correlation, and are normally distributed signifying that the model is good enough. This study satisfies an eminent necessity of how CPI and GDS supportive for economic growth.