Supply-driven Factors of Inflation in Sri Lanka: An ARDL Approach

Abstract

Inflation has become one of the major enemies of the Sri Lankan economy today. This study focuses on the supply-driven determinants of inflation in Sri Lanka during 1977-2019. For this study, time series data is used using the technique of ARDL in order to determine the long-run and short-run determinants of inflation. The estimated long-run supply-driven variables are crude oil prices and exchange rate as they were impacting the inflating during the study period except the rice prices. However, the empirical findings indicated that crude oil prices, exchange rate and rice prices impacted inflation in the short-run. Even though Central Bank of Sri Lanka (CBSL) was confident about the controlling demand pressures, at the same time it needs to be cautious about the price pressures emanating from supply-side shocks. Policymakers need to vigilantly monitor each and every movement in the economy and sense the pulses of policy measures.