Abstract:
Fiscal deficit is an important issue in developing countries as it can have
impacts on macroeconomic variables such as inflation. The present study
examined the persistence of fiscal deficit as a determinant of inflation and
focused on long-run co-integration between inflation and fiscal deficits in Sri
Lanka from 1977-2019. Inflation was taken as the dependent variable and
the study was based on autoregressive distributed lag (ARDL) to investigate
the long-run relationships among the variables and the error correction
model (ECM) to examine short-run dynamics. The co-integration among the
variables was indicated through the bound test approach when inflation was
the dependent variable. The bound test suggested the presence of co integration among the variables when inflation is taken as the dependent
variable and hence the long-run relationship between inflation and fiscal
deficit in Sri Lanka. The policymakers should think of increasing the revenue
through taxes in order to bridge the fiscal deficit.
