Date of Award

1983

Degree Type

Thesis

Degree Name

Doctor of Philosophy (PhD)

Department

Economics / Economic Policy

Supervisor

D.W. Butterfield

Co-Supervisor

F.T. Denton

Language

English

Committee Member

D. Welland

Abstract

In this study a disaggregated macroeconometric model is developed and estimated for the Sri Lankan economy. Since there have been few quantitative analyses of the economy, our study supplies valuable information to other researchers and to decision-makers in the country. Based on the literature available, this is the first macroeconometric model for the Sri Lankan economy estimated with time series data. The main purpose of the model is to examine how the various subsectoral outputs and prices are determined and subsequently how these sectoral values determine the aggregate real output and general price levels; the GNP deflator and the cost of living index. Sri Lanka is a developing country and its major economic problems are mainly related to the supply side of its economy. Hence, our model takes both supply and demand factors into consideration but gives more emphasis to the supply side of the economy. In the present model outputs and prices are determined by domestic market forces, government economic activities, and international market forces. The economy is disaggregated into major sectors and each sector is in turn divided into a number of subsectors. The choice of subsectoral disaggregation is determined by the importance of subsectors in the economy. Since the government plays an important role in the economy, government expenditure, income and budget financing are taken into consideration. Subsequently, determination of the money supply, general price levels, exports, imports, the balance of payments and aggregate real output are considered. Both the government budget constraint and the balance of payments constraint are taken into account in our model. The complete model is made up of 35 behavioural equations, 7 market clearing conditions, 47 identities, 89 endogenous variables, 40 exogenous policy varIables and 42 other exogenous variables. To estimate the model, annual time series data for Sri Lanka are used for the period 1950 to 1980. In the first stage subsectoral models are estimated separately. In the second stage the entire model is reestimated based on selected principal components. The predictive ability of the model is evaluated based on historical simulation results. Subsequently a set of simulation experiments designed to evaluate the effects of the changes in various exogenous variables on the endogenous variables are carried out, and a conditional forecast for the period 1981 to 1990 is calculated using the model. The simulation results suggest that aggregate output can be increased by transferring government expenditure from consumer subsidies to producer subsidies and/or by shifting government expenditure amongst production subsectors. Foreign aid is not inflationary and its effects on real output and prices differ according to the use to which it is put.

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