ABSTRACT
This study estimates the influence of monetary expansion on inflation in Sri Lanka during the period, 1959–74. After a brief discussion of the historical background, a theoretical model is presented to show the link between money supply, inflation, and balance of payments deficits. The rest of the paper is devoted to the statistical testing of the model. One of the findings of this study is that, for the entire period, 1959–74, money supply has not exerted a statistically significant influence on domestic inflation. But for the more recent period, 1967–74, the impact of money supply on inflation appears to be statistically significant. It is also found that domestic inflation has not been strong enough to have an adverse effect on exports, although further research is obviously necessary to shed more light on this question.
