Empirical study on the relationship between budget deficit and economic growth in the case of Sri Lanka

Abstract

The main purpose of this study is to fill the existing research gap by answering the research question, “What is the relationship between budget deficit and economic growth in Sri Lanka?” The study used time series data from Central Bank of Sri Lanka from 1960 to 2015 and adopted the model designed by Shojai (1999). Preliminary results from the ADF test indicated that the variables are stationary at first difference but there was no co-integration among the variables after applying Johansen Co-integration test. The Vector Auto Regression Model(VAR) was used to analyze the data to examine the impact of the budget deficit on GDP. Evidence from the study revealed that budget deficit positively impacts the economic growth in Sri Lanka.