An Inquiry into the Causes of Inflation in Sri Lanka: An Eclectic Approach

Abstract

The objective of this study is to identify the short and long-run determinants of inflation in Sri Lanka. It follows an eclectic approach to seeking possible determinants of inflation and employs an Autoregressive Distributed Lag (ARDL) bounds testing approach to test for co integration between inflation and its causes. The findings indicate that increased money supply, depreciation of the rupee and higher public wages are the major causes of inflation in both the short and long-run. Thus, it can be stated that inflation in Sri Lanka is affected by both demand and supply side factors, which highlights the importance of a prudent and effective implementation of the monetary and fiscal policies so as to ensure a stable macroeconomic environment in Sri Lanka.