EFFECT OF CENTRAL BANK INDEPENDENCE ON INFLATION, UNEMPLOYMENT AND ECONOMIC GROWTH IN SRI LANKA

Abstract

Central Bank of Sri Lanka is a monetary authority of the country and it plays vital role in the economy. There is main two objectives of the central bank. They are achieving economic and price stability and financial system stability. According to that monetary policy uses for reaching stable price level or reduce the price level in the country. At the same time, central bank independence considered as an important concept when achieving such loan term goals. Then CBI depend upon political intervention of the country. In reality, there is a political intervention for CB when conducting monetary policy because of fluctuations of inflation rather than expected rate. Not only that political intervention is proven by bonds scam happen on 2015.Therefore first objective of the study is to investigate direct impact of CBI on economic growth in Sri Lanka and other objectives are to investigate mediate impact of CBI on economic growth through inflation and to investigate mediate impact of CBI on economic growth through unemployment. The study was conducted using a quantitative methodology. The researcher used secondary data as the source of data for the study. Data gathered through the CBI in the world data set updated by Garriga (2016) according to CWN index from year 1990 to 2012 and researcher calculated CBI from CWN index in 2013- 2018.Also researcher gathered data from world bank data and CB data library.The study is conceptualized CBI (Independent variable),economic growth (Dependent variable ) and inflation and unemployment( mediated varibles).Also researcher has identified there is a positive and significant relationship between CBI and economic growth,positive and significant relationship between inflation and economic growth, positive and significant relationship between unemployment and economic growth, negative and significant relationship between CBI and inflation rate, negative and significant relationship between CBI and unemployment rate. Moreover, researcher found there is a negative and significant relationship between CBI and economic growth through mediate channel variable of inflation and there is negative and significant relationship between CBI and economic growth through mediate channel variable of unemployment.