Ekanayake, E. M.; Dissanayake, P. M. A. L.
A icle
Empi ical in es iga ion o he sou ces o in la ion in S i
Lanka: Assessing he oles o global and domes ic d i e s
Economies
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sou ces o in la ion in S i Lanka: Assessing he oles o global and domes ic d i e s, Economies,
ISSN 2227-7099, MDPI, Basel, Vol. 13, Iss. 4, pp. 1-18,
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Recei ed: 20 Janua y 2025
Re ised: 31 Ma ch 2025
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Published: 2 Ap il 2025
Ci a ion: Ekanayake, E. M., &
Dissanayake, P. M. A. L. (2025).
Empi ical In es iga ion o he Sou ces
o In la ion in S i Lanka: Assessing he
Roles o Global and Domes ic D i e s.
Economies,13(4), 102. h ps://doi.o g/
10.3390/economies13040102
Copy igh : © 2025 by he au ho s.
Licensee MDPI, Basel, Swi ze land.
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licenses/by/4.0/).
A icle
Empi ical In es iga ion o he Sou ces o In la ion in S i Lanka:
Assessing he Roles o Global and Domes ic D i e s
E. M. Ekanayake 1,* and P. M. A. L. Dissanayake 2
1College o Business and En ep eneu ship, Be hune-Cookman Uni e si y, 640 D . Ma y McLeod Be hune
Bl d., Day ona Beach, FL 32114, USA
2Depa men o Economics, Uni e si y o Colombo, Colombo 03, S i Lanka; [email p o ec ed]
*Co espondence: [email p o ec ed]; Tel.: +1-(386)-481-2819
Abs ac : The annual in la ion a e in S i Lanka accele a ed o eco d le els in ecen yea s,
especially a e he COVID-19 pandemic. Though he in la ion a e had declined o p e-
pandemic le els by mid-2024, i is o g ea impo ance o iden i y he ac o s ha caused
hype in la ion du ing he COVID-19 pandemic. The objec i e o his s udy is o in es iga e
he d i e s o in la ion in S i Lanka using a s uc u al ec o au o eg essi e model and a
mul iple eg ession model. The s udy assesses bo h he global d i e s and he domes ic
d i e s o in la ion. The s udy uses mon hly da a on he in la ion a e, global oil p ice,
exchange a e, policy a e, he global supply chain p essu e index, and unemploymen
a e, co e ing he pe iod om Janua y 2020 o Augus 2024, ocusing on he pe iod o
apid inc ease in he in la ion a e in S i Lanka. The empi ical esul s o he s udy p o ide
e idence o conclude ha he in la ion a e in S i Lanka du ing he 2020–2024 pe iod was
mainly d i en by he g ow h a es in money supply, exchange a es, and global supply
chain dis up ions. The esul s also show ha he ola ili y o he S i Lanka in la ion a e is
mos ly explained by he money supply and exchange a e mo emen s in he long un.
Keywo ds: in la ion; mone a y policy; exchange a e; global oil p ice; S i Lanka
JEL Classi ica ion: E31; E52; F41
1. In oduc ion
S i Lanka was g appling wi h i s wo s inancial c isis in se en decades because o
economic mismanagemen and he impac o he COVID-19 pandemic du ing he pe iod
om mid-2021 o mid-2023. Acco ding o he Wo ld Heal h O ganiza ion, mos o he
COVID-19 in ec ions and dea hs in S i Lanka happened be ween Oc obe 2020 and Ma ch
2022 (see Figu e 1). Though COVID-19 was no di ec ly esponsible o he apid in la ion
in S i Lanka, go e nmen policies ha we e used o comba COVID-19 du ing and a e
he pandemic played an impo an ole. As Figu e 2illus a es, he annual in la ion a e
in S i Lanka accele a ed o eco d le els in ecen yea s, especially a e he COVID-19
pandemic. This episode o high in la ion in S i Lanka ook place be ween Oc obe 2021
and June 2023, and i kep he in la ion a e abo e 10%. As Figu e 2demons a es, bo h he
headline in la ion and he co e in la ion emained abo e 10% be ween Decembe 2021 and
June 2023. S i Lanka also expe ienced hype in la ion be ween June 2022 and Ma ch 2023,
wi h he in la ion a e emaining con inuously abo e 50% du ing ha pe iod. Acco ding
o he Depa men o Census and S a is ics, S i Lanka’s in la ion a e, measu ed using he
Na ional Consume P ice Index (NCPI), ose o a peak o 73.6% in Sep embe 2022 on
a yea -on-yea basis. Since hen, he in la ion a e declined g adually o each 59.2% in
Economies 2025,13, 102 h ps://doi.o g/10.3390/economies13040102
Economies 2025,13, 102 2 o 18
Decembe 2022. Disin la ion con inued h oughou he yea 2023 and he in la ion a e
d opped below 5% in July 2023, on a yea -on-yea basis.
Economies 2025, 13, x FOR PEER REVIEW 2 o 18
Acco ding o he Depa men o Census and S a is ics, S i Lanka’s in la ion a e, measu ed
using he Na ional Consume P ice Index (NCPI), ose o a peak o 73.6% in Sep embe
2022 on a yea -on-yea basis. Since hen, he in la ion a e declined g adually o each
59.2% in Decembe 2022. Disin la ion con inued h oughou he yea 2023 and he in la-
ion a e d opped below 5% in July 2023, on a yea -on-yea basis.
Howe e , he e we e signs o he in la ion a e dec easing in 2023. Acco ding o he
Cen al Bank o S i Lanka, as measu ed by he yea -on-yea (Y-o-Y) change in he Co-
lombo Consume P ice Index (CCPI, 2021 = 100), he in la ion a e dec eased o 35.3% in
Ap il 2023 om 50.3% in Ma ch 2023. The lowe le el o ealized in la ion compa ed o
he p ojec ions made was mainly due o highe - han-expec ed p ice dec eases obse ed
in ola ile ood and non- ood i ems. The ood in la ion (Y-o-Y) dec eased o 30.6% in Ap il
2023 om 47.6% in Ma ch 2023, while he non- ood in la ion (Y-o-Y) dec eased o 37.6%
in Ap il 2023 om 51.7% in Ma ch 2023.
Figu e 1. COVID-19 cases and dea hs in S i Lanka, 2020–2024. No e: The igu e was cons uc ed
using he da a om he Wo ld Heal h O ganiza ion (WHO).
Figu e 1. COVID-19 cases and dea hs in S i Lanka, 2020–2024. No e: The igu e was cons uc ed
using he da a om he Wo ld Heal h O ganiza ion (WHO).
Howe e , he e we e signs o he in la ion a e dec easing in 2023. Acco ding o he
Cen al Bank o S i Lanka, as measu ed by he yea -on-yea (Y-o-Y) change in he Colombo
Consume P ice Index (CCPI, 2021 = 100), he in la ion a e dec eased o 35.3% in Ap il 2023
om 50.3% in Ma ch 2023. The lowe le el o ealized in la ion compa ed o he p ojec ions
made was mainly due o highe - han-expec ed p ice dec eases obse ed in ola ile ood
and non- ood i ems. The ood in la ion (Y-o-Y) dec eased o 30.6% in Ap il 2023 om 47.6%
in Ma ch 2023, while he non- ood in la ion (Y-o-Y) dec eased o 37.6% in Ap il 2023 om
51.7% in Ma ch 2023.
Acco ding o he Cen al Bank o S i Lanka, looking ahead, based on he a ailable in-
o ma ion, he an icipa ed declining end o in la ion is expec ed o con inue h ough 2024,
b inging down he p e ailing high in la ion owa ds single-digi le els by la e 2024. This
disin la ion p ocess is suppo ed by subdued agg ega e demand owing o igh mone a y
and iscal policy measu es and he no maliza ion o supply condi ions bo h globally and
domes ically, along wi h he g ea e pass- h ough o lowe global commodi y p ices.
Economies 2025,13, 102 3 o 18
Economies 2025, 13, x FOR PEER REVIEW 3 o 18
Figu e 2. Headline in la ion and co e in la ion in S i Lanka, 2020–2024. No e: The igu e was con-
s uc ed using da a om he Cen al Bank o S i Lanka. The in la ion a es we e calcula ed using he
yea -on-yea (Y-o-Y) pe cen age change in he Colombo Consume P ice Index (2021 = 100).
Acco ding o he Cen al Bank o S i Lanka, looking ahead, based on he a ailable
in o ma ion, he an icipa ed declining end o in la ion is expec ed o con inue h ough
2024, b inging down he p e ailing high in la ion owa ds single-digi le els by la e 2024.
This disin la ion p ocess is suppo ed by subdued agg ega e demand owing o igh mon-
e a y and iscal policy measu es and he no maliza ion o supply condi ions bo h globally
and domes ically, along wi h he g ea e pass- h ough o lowe global commodi y p ices.
Gi en his a he unusual inc ease in in la ion in S i Lanka, iden i ying he igge s
behind i is o g ea impo ance since i would help o decide on which measu es o ake
o p e en he occu ence o simila episodes in he u u e. This s udy has iden i ied se -
e al ac o s ha may ha e con ibu ed o apid in la ion in ecen yea s. The ecen ends
o hese ac o s a e p esen ed in Figu e 3. The in la ion a e measu ed by he yea -on-yea
change in he CCPI eached a peak o 73.7% in Sep embe 2022 while he mon h-on-mon h
change in he CCPI eached a peak o 10.9% in June 2022. These inc eases we e ollowed
by he money supply inc easing by 7.6% and he nominal exchange a e dep ecia ing by
48.7% in Ma ch 2022. The policy a e also inc eased om 6.5% in Ma ch 2022 o 13.5% in
Ap il 2022. The combina ion o hese ac o s may ha e con ibu ed o high in la ion in
2022. The objec i e o his s udy s o in es iga e he bo h he global d i e s and he do-
mes ic d i e s o in la ion in S i Lanka.
Figu e 2. Headline in la ion and co e in la ion in S i Lanka, 2020–2024. No e: The igu e was
cons uc ed using da a om he Cen al Bank o S i Lanka. The in la ion a es we e calcula ed using
he yea -on-yea (Y-o-Y) pe cen age change in he Colombo Consume P ice Index (2021 = 100).
Gi en his a he unusual inc ease in in la ion in S i Lanka, iden i ying he igge s
behind i is o g ea impo ance since i would help o decide on which measu es o ake o
p e en he occu ence o simila episodes in he u u e. This s udy has iden i ied se e al
ac o s ha may ha e con ibu ed o apid in la ion in ecen yea s. The ecen ends o
hese ac o s a e p esen ed in Figu e 3. The in la ion a e measu ed by he yea -on-yea
change in he CCPI eached a peak o 73.7% in Sep embe 2022 while he mon h-on-mon h
change in he CCPI eached a peak o 10.9% in June 2022. These inc eases we e ollowed by
he money supply inc easing by 7.6% and he nominal exchange a e dep ecia ing by 48.7%
in Ma ch 2022. The policy a e also inc eased om 6.5% in Ma ch 2022 o 13.5% in Ap il
2022. The combina ion o hese ac o s may ha e con ibu ed o high in la ion in 2022. The
objec i e o his s udy s o in es iga e he bo h he global d i e s and he domes ic d i e s
o in la ion in S i Lanka.
In his pape , we con ibu e o he eme ging empi ical li e a u e dealing wi h he
causes o in la ion du ing he COVID-19 pandemic ocusing on a small open economy
ha depends hea ily on impo s o p oduc s, such as manu ac u ed goods, pe oleum,
machine y, chemicals and ela ed goods, and ood. A e his in oduc o y sec ion, he
emaining sec ions o he pape a e o ganized as ollows: Sec ion 2p esen s a e iew
o he li e a u e while Sec ion 3p esen s he me hodology and da a sou ces. Sec ion 4
p esen s empi ical esul s and a discussion o he esul s. The main indings o he s udy
a e summa ized and conclusions a e d awn in Sec ion 5.
Economies 2025,13, 102 4 o 18
Economies 2025, 13, x FOR PEER REVIEW 4 o 18
Figu e 3. Economic indica o s ha we e used in he es ima ion. No e: The pe cen age o he Na ional
Consume P ice Index (mon h-on-mon h o yea -on-yea ) was used as he a e o in la ion. GSCPI
ep esen s he Global Supply Chain P essu e Index.
In his pape , we con ibu e o he eme ging empi ical li e a u e dealing wi h he
causes o in la ion du ing he COVID-19 pandemic ocusing on a small open economy
ha depends hea ily on impo s o p oduc s, such as manu ac u ed goods, pe oleum,
machine y, chemicals and ela ed goods, and ood. A e his in oduc o y sec ion, he
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
2019M1
2019M4
2019M7
2019M10
2020M1
2020M4
2020M7
2020M10
2021M1
2021M4
2021M7
2021M10
2022M1
2022M4
2022M7
2022M10
2023M1
2023M4
2023M7
2023M10
2024M1
2024M4
2024M7
Consume P ice I ndex (Mon h-on-Mon h % Changes)
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
2019M1
2019M4
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2020M4
2020M7
2020M10
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2021M4
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2021M10
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2022M7
2022M10
2023M1
2023M4
2023M7
2023M10
2024M1
2024M4
2024M7
Consume P ice Index (Yea -on-Yea % Changes)
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
2019M1
2019M4
2019M7
2019M10
2020M1
2020M4
2020M7
2020M10
2021M1
2021M4
2021M7
2021M10
2022M1
2022M4
2022M7
2022M10
2023M1
2023M4
2023M7
2023M10
2024M1
2024M4
2024M7
Money Supply (% Changes)
-60.00
-40.00
-20.00
0.00
20.00
40.00
60.00
80.00
2019M1
2019M4
2019M7
2019M10
2020M1
2020M4
2020M7
2020M10
2021M1
2021M4
2021M7
2021M10
2022M1
2022M4
2022M7
2022M10
2023M1
2023M4
2023M7
2023M10
2024M1
2024M4
2024M7
Global Oil P ice (% Changes)
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
60.00
2019M1
2019M4
2019M7
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2021M4
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2023M10
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2024M4
2024M7
Exchange Ra e (% Changes)
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
2019M1
2019M4
2019M7
2019M10
2020M1
2020M4
2020M7
2020M10
2021M1
2021M4
2021M7
2021M10
2022M1
2022M4
2022M7
2022M10
2023M1
2023M4
2023M7
2023M10
2024M1
2024M4
2024M7
GSCPI
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
2019M1
2019M4
2019M7
2019M10
2020M1
2020M4
2020M7
2020M10
2021M1
2021M4
2021M7
2021M10
2022M1
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2022M7
2022M10
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2023M10
2024M1
2024M4
2024M7
Unemplymen Ra e (Changes)
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
2019M1
2019M4
2019M7
2019M10
2020M1
2020M4
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2020M10
2021M1
2021M4
2021M7
2021M10
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2022M4
2022M7
2022M10
2023M1
2023M4
2023M7
2023M10
2024M1
2024M4
2024M7
Policy Ra e (Changes)
Figu e 3. Economic indica o s ha we e used in he es ima ion. No e: The pe cen age o he Na ional
Consume P ice Index (mon h-on-mon h o yea -on-yea ) was used as he a e o in la ion. GSCPI
ep esen s he Global Supply Chain P essu e Index.
Economies 2025,13, 102 5 o 18
2. Re iew o Li e a u e
A signi ican body o li e a u e can be ound on he d i e s o in la ion. In his sec ion,
a summa y o a wide a ie y o ela ed ecen s udies is p esen ed.
Cong egado and Es e e (2022) s udied he ela ionship be ween money g ow h and
in la ion in Spain using a classical in la ion model wi h a ional expec a ions. The s udy
used da a co e ing he pe iod om 1830 o 1998 and employed coin eg a ion analysis. The
s udy ound ha igno ing he s uc u al changes in he long- un coin eg a ion ela ionships
may unde s a e he ex en o he ela ionship be ween in la ion a e and money g ow h.
Kilian and Zhou (2022) examined he pe sis ence o in la iona y e ec s esul ing
om gasoline p ice shocks, using mon hly da a o he U.S. om Ap il 1990 o May 2022.
The s udy used a s uc u al ec o au o eg essi e (SVAR) model and ound no e idence
ha hese e ec s a e pe sis en , al hough he sho - e m impac on headline in la ion is
signi ican . Howe e , gasoline p ice shocks accoun ed o only a small po ion o o e all
in la ion. In con as , he s udy es ima ed ha he e ec on co e pe sonal consump ion
expendi u e (PCE) in la ion in 2022 and 2023 would be app oxima ely 0.3 pe cen age poin s,
al eady inco po a ing inc eases in in la ion expec a ions.
Ga zón and Hie o (2022) in es iga ed he co ela ion be ween he eu o/dolla ex-
change a e and oil p ices, as well as i s impac on he ansmission o oil p ice luc ua ions
o headline in la ion wi hin he Eu o a ea since he in oduc ion o he common cu ency.
The s udy used qua e ly da a o he Eu o A ea, he U.K., and Japan, spanning a pe iod
om 1999Q1 o 2019Q3. The s udy es ima ed an augmen ed Phillips cu e ha inco po a ed
oil p ice changes o examine he ole o he exchange a e in he oil p ice pass- h ough using
mul iple model speci ica ions. The indings indica e a posi i e co ela ion be ween he
eu o/dolla exchange a e and oil p ices, whe eby an inc ease in oil p ices led o an app eci-
a ion o he eu o. Addi ionally, he s udy ound ha he app ecia ion o he eu o pa ially
mi iga ed he ansmission o oil p ice luc ua ions o he Eu o a ea’s headline in la ion.
Kan u and Özcan (2021) examined in la ion dynamics du ing he COVID-19 pan-
demic, inding ha in la ion was highe han he o icial gene al in la ion a e du ing he
i s lockdown, sugges ing beha io al shi s in consump ion pa e ns. Using c edi and
debi ca d ansac ion da a om Tu key, he s udy cons uc ed an al e na i e pandemic
consump ion baske p ice index om Janua y 2020 o Feb ua y 2021, inco po a ing e ised
Consume P ice Index (CPI) weigh s. The esul s indica e ha consump ion habi s la gely
e e ed o p e-pandemic pa e ns du ing he eopening pe iod. Fu he mo e, he s udy
ound ha he di e ence be ween pandemic-speci ic in la ion and gene al in la ion was
less p onounced du ing he second lockdown compa ed o he i s .
Bonam and Smădu (2021) analyzed his o ical pandemics and hei long- e m e ec s on
end in la ion in Eu ope, using a his o ical da ase which co e ed he pe iod 1313–2018 and
an in la ion se ies o six Eu opean coun ies: F ance (1387–2018), Ge many (1326–2018),
I aly (1314–2018), he Ne he lands (1400–2018), Spain (1400–1729, 1800–2018), and he UK
(1314–2018). The s udy ound ha pas pandemics led o a signi ican decline in end
in la ion las ing o e a decade. Howe e , he s udy sugges s ha he impac o COVID-19
on end in la ion may di e om p e ious pandemics.
Coch ane (2022) s udied he iscal oo s o in la ion using U.S. da a o he pe iod
om 1947 o 2018. The s udy de eloped a se o linea ized iden i ies exp essing he
ela ionship be ween go e nmen deb , in la ion, and iscal su pluses. The s udy asse s
ha he eal alue o go e nmen deb equals he p esen alue o eal p ima y su pluses.
The indings indica e ha nominal go e nmen deb is de alued by highe in la ion, and
as a esul , highe in la ion co esponds o lowe su plus- o-GDP a ios, slowe GDP
g ow h, and highe discoun a es on go e nmen deb . Empi ical analysis, based on
ec o au o eg ession and esponses o ecession, in la ion, and iscal shocks, showed ha
Economies 2025,13, 102 6 o 18
discoun a es accoun ed o signi ican a ia ion in in la ion and he cyclical in la ion
pa e n. Fu he mo e, he s udy ound ha long- e m go e nmen bonds we e g adually
de alued by mode a e in la ion ollowing iscal shocks.
Bilici and Cekin (2020) analyzed in la ion dynamics by es ima ing he pe sis ence o
in la ion in Tu key om 1990 o 2018. In la ion pe sis ence was de ined as he speed a
which in la ion e u ns o i s equilib ium le el a e a shock. The s udy applied a ime-
a ying pa ame e es ima ion me hod based on he Kalman il e . The indings indica e
ha in la ion pe sis ence inc eased and exhibi ed high ola ili y du ing pe iods o high in-
la ion, nega i ely impac ing p icing beha io s and in la ion expec a ions. Addi ionally, he
s udy ound ha in la ion began declining a e 2003 and became less pe sis en ollowing
ins i u ional changes in mone a y policy. The mone a y policy was e ec i e in main aining
p ice s abili y un il 2016. Howe e , empi ical esul s showed a conside able inc ease in
in la ion pe sis ence om 2016 onwa d, coinciding wi h a ising in la ion end.
Jiang e al. (2022) examined he impac o he COVID-19 pandemic on in la ion in
China using online p ices om 107 Chinese websi es and he di e ence-in-di e ences
me hod o exclude he e ec o he Sp ing Fes i al. The s udy ound ha he pandemic led
o a sudden 0.4% inc ease in he o e all in la ion a e, a 20% educ ion in he p obabili y
o p ice changes, and a 1% educ ion in he absolu e p ice change size. The pandemic
had he e ogeneous e ec s ac oss a ious sec o s, causing signi ican s uc u al changes in
in la ion. P ice co ec ion beha io s a e he Sp ing Fes i al we e dis up ed, and whe he
p oduc s could be consumed while cus ome s emained a home was a c ucial ac o
a ec ing in la ion dynamics and p ice adjus men s.
A s udy by Elbahnasawy and Ellis (2022) in es iga ed he ela ionship be ween in-
la ion and e s uc u e o economic and poli ical sys ems using a wide ange o poli ical
and economic s uc u e a iables. The s udy was based on a panel da ase o 156 coun ies
co e ing he pe iod om 1970 o 2009. The s udy ound ha bo h economic and poli ical
s uc u es a e impo an de e minan s o in la ion. The s udy also ound ha a la ge
na u al esou ce sec o o a la ge shadow economy was associa ed wi h highe in la ion.
Al u ki and Olson (2022) analyzed he impac o in es o sen imen on he in la ion
p emium in he Uni ed S a es. The s udy used daily da a om 18 July 2008 o 31 Augus
2019. The s udy ound ha one s anda d de ia ion posi i e shock o gene al in es o
sen imen ega ding oil p ices leads o an app oxima e 1.2% inc ease in he in la ion
p emium o e he ollowing 10 weeks. The analysis was conduc ed using a s uc u al
ec o au o eg essi e (SVAR) model and ou -o -sample o ecas s. The indings indica e ha
ins i u ional in es o sen imen has a mo e p onounced e ec on he in la ion p emium han
indi idual in es o sen imen . Addi ionally, he s udy p o ides ou -o -sample e idence
sugges ing ha he gene al in es o sen imen ega ding oil p ices has p edic i e powe
o e he U.S. in la ion p emium.
A si´c e al. (2022) examined he impac o in la ion- a ge ing mone a y amewo ks
on mac oeconomic pe o mance, u ilizing da a om 26 eme ging economies in Eu ope
and Cen al Asia be ween 1997 and 2019. The s udy employed p opensi y sco e ma ching
and dynamic panel modeling o econome ic analysis, measu ing economic pe o mance
h ough in la ion a es, in la ion ola ili y, and GDP ola ili y. The indings sugges ha
in la ion a ge ing has enhanced mac oeconomic s abili y in hese economies.
Mish a and Dubey (2022) in es iga ed he spillo e e ec s o he in la ion- a ge ing
mone a y policy on inancial s abili y in eme ging ma ke economies. Using da a om
64 eme ging ma ke s o he pe iod om 1998 o 2017, he s udy de eloped sec o -speci ic
s abili y and inancial s abili y indices, employing dynamic panel da a models wi hin
a di e ence-in-di e ences amewo k. The indings sugges ha in la ion a ge ing has
signi ican posi i e spillo e e ec s on banking sys em esilience and ex e nal capi al
Economies 2025,13, 102 7 o 18
in lows, d i en by imp o ed cen al bank accoun abili y and anspa ency. The s udy
ecommends ha eme ging ma ke s cu en ly unde an in la ion- a ge ing li e egime
ansi ion o a ull- ledged in la ion- a ge ing amewo k.
Pie gallini (2022) examined he dynamic implica ions o a e age in la ion a ge ing
wi hin a ac able mone a y amewo k ea u ing s icky p ices. The s udy demons a ed
ha when a cen al bank assigns a ela i ely high weigh o pas in la ion, a e age in la ion
a ge ing no only ensu es local equilib ium de e minacy bu also e ec i ely mi iga es
liquidi y ap issues—con as ing wi h s anda d Taylo ules. Speci ically, he s udy iden i-
ied a saddle-pa h connec ion be ween he de la iona y s eady s a e and he a ge s eady
s a e, acili a ing e la ion h ough g adual and mode a e inc eases in expec ed nominal
in e es a es.
Basse and Wegene (2022) analyzed he ela ionship be ween in la ion expec a ions,
in e es a es, and in la ion a es in Aus alia using mon hly da a om Janua y 1995 o
Janua y 2019, es ing o G ange causali y. Empi ical e idence om consume su eys
sugges ed ha unidi ec ional G ange causali y an om medium- and long- e m go e n-
men bond yields o sho - un in la ion expec a ions. Addi ionally, bidi ec ional G ange
causali y was obse ed be ween sho - e m in e es a es and sho - un consume in la ion
expec a ions. Sen imen al da a measu ing in la ion and in e es a e expec a ions we e
ound o be use ul in o ecas ing in la ion a es, wi h bond ma ke s demons a ing high
e iciency in his ega d. The s udy u he discussed issues ela ed o adi ional es s o he
Fishe hypo hesis and examined he ole o inancial de egula ion in Aus alia, emphasizing
he ele ance o he Lucas c i ique in es ing he Fishe e ec .
Oo e al. (2021) cons uc ed annual in la ion a e o ecas s o Su iname using mixed
da a sampling eg ession, inco po a ing mon hly in la ion a es as explana o y a iables.
Gi en ha mon hly in la ion da a we e a ailable o only one and a hal decades, he s udy
ocused on e ining o ecas accu acy. The cons uc ed model was associa ed wi h a hyb id
New Keynesian Phillips cu e and demons a ed high accu acy, pa icula ly du ing he
high-in la ion pe iod o 2016–2017. Fo ecas pe o mance imp o ed signi ican ly when da a
om May we e included. Addi ionally, he s udy ound ha applying speci ic pa ame e
es ic ions u he enhanced o ecas accu acy.
Behe a and Pa a (2022) examined he concep o end in la ion, which ep esen s he
le el o which ac ual in la ion is expec ed o con e ge a e sho - e m luc ua ions subside.
The s udy used qua e ly da a o India co e ing he pe iod om 1980Q1 o 2019Q4. Thei
indings sugges ha in la ion expec a ions mus align wi h end in la ion o p e en
unancho ed in la ion expec a ions, a la ened agg ega e supply cu e, o he ansmission
o a de la iona y bias o he economy. Using a egime-swi ching model applied o a hyb id
New Keynesian Phillips cu e, he s udy ound a s eady decline in end in la ion om
2014 o jus be o e he onse o COVID-19, eaching 4.1–4.3%. Based on hese esul s, he
s udy ecommended main aining an in la ion a ge o 4% o India.
C uz (2022) in es iga ed whe he he decline in mac oeconomic ola ili y ollowing
he adop ion o in la ion a ge ing was d i en by shocks (impulses) o s uc u al s abili y
(p opaga ion). Using qua e ly da a om bo h eme ging (Thailand, Mexico, Sou h Ko ea,
he Philippines, and Indonesia o he pe iod 1980Q1–2017Q4) and ad anced economies
(New Zealand, Canada, he Uni ed Kingdom, Sweden, and Aus alia o he pe iod 1960Q1–
2017Q4), he esul s indica e ha he obse ed educ ion in in la ion a iabili y was p i-
ma ily a ibu able o he p opaga ion mechanism (i.e., a mo e s able economic s uc u e),
while he educ ion in ou pu ola ili y was la gely d i en by smalle ex e nal shocks.
Han e al. (2022) de eloped a a ional expec a ions amewo k o in es iga e he
impac o in o ma ion ic ions and nominal igidi y on in la ion and in la ion belie s. The
s udy used U.S. da a co e ing he pe iod om 1968Q4 o 2019Q4. The s udy analy ically
Economies 2025,13, 102 8 o 18
de i ed a Phillips cu e linking in la ion, a e age in la ion expec a ions, and he ne
e ec o highe -o de expec a ions. The esul s highligh he signi ican ole o dispe sed
in o ma ion in shaping in la ion dynamics and o ecas e o s. The es ima ed impac o
dispe sed in o ma ion explained a subs an ial sha e o in la ion a iabili y, while he ne
e ec o highe -o de expec a ions p o ided a no el mic o ounda ion o ma kup shocks.
Dumi escu e al. (2022) explo ed he nonlinea ela ionship be ween public deb and
in la ion using da a om 22 eme ging economies co e ing he 2006 o 2015 pe iod. The
s udy p o ided empi ical e idence o h eshold e ec s, indica ing ha economies wi h
ela i ely low le els o shadow economic ac i i y could accommoda e highe public deb
wi hou incu ing addi ional in la ion- ela ed wel a e cos s. Howe e , in coun ies whe e
he shadow economy exceeded 24.3% o GDP, public deb expansion was associa ed wi h
signi ican ly highe mac oeconomic cos s, including inc eased in la ion. These indings
sugges ha such economies had limi ed policy lexibili y in add essing he economic
impac o he COVID-19 pandemic.
Doho e al. (2023) in es iga ed he ela ionship be ween in la ion and sec o al indices
in Wes A ica om No embe 2001 o Janua y 2020 using he asymme ic ke nel me hod.
The s udy analyzed indices in inance, e ail, u ili ies, indus y, anspo a ion, ag icul u e,
and o he sec o s. The esul s showed ha he u ili ies and ag icul u e sec o s we e he mos
sensi i e o in la ion changes. A nonlinea ela ionship was iden i ied be ween in la ion
and sec o al s ock ma ke indices, suppo ing he hypo hesis ha he co ela ion be ween
in la ion and s ock ma ke indices a ies ac oss di e en in la iona y economies. The
indings sugges ha in es o s adjus hei in es men po olios in esponse o in la ion
a ia ions, ul ima ely impac ing u u e di idends.
Hall e al. (2023) analyzed he ecen d i e s o in la ion in h ee cu ency a eas: he
USA, he UK, and he Eu ozone, using he da a om 2000 o 2022. A ec o au o eg essi e
(VAR) model, Cholesky decomposi ion, and spa ial modeling we e used o iden i y he
na u e o in la iona y shocks. The s udy ound ha in la iona y shocks in he USA we e
s ongly ansmi ed o he UK and he Eu ozone. Addi ionally, he Eu ozone ansmi ed
in la iona y p essu es o a lesse ex en , while in la ion in he UK had minimal impac on
he o he wo egions.
Makin e al. (2017) examined he ela ionship be ween in la ion and excess cu ency
g ow h in Aus alia. The s udy i s e iewed he ope a ion o mone a y policy be o e
analyzing how excess money supply g ow h, measu ed by M3 and cu ency, in luenced
in la ion in Aus alia om 1970 o 2015 using a ious econome ic echniques. The s udy
also compa ed he p e- and pos -in la ion a ge ing pe iods. The esul s indica e ha excess
money g ow h was a key de e minan o in la ion in Aus alia, hough i s signi icance
declined ollowing he adop ion o in la ion a ge ing. The indings sugges ha cu ency
eloci y, a undamen al componen o he quan i y heo y o money, emained s able.
Consequen ly, he s udy ecommended ha he ole o excess cu ency g ow h in in la ion
should ecei e g ea e a en ion in mone a y policy delibe a ions.
Chowdhu y and Ga g (2022) in es iga ed whe he he COVID-19 c isis s eng hened
he dynamic ela ionship be ween exchange a es and oil p ices. The s udy was based on
da a o he pe iod om 2 Janua y 2017 o 10 Augus 2020, co e ing ou coun ies, namely,
China, India, Japan, and Ko ea. The s udy iden i ied signi ican b eaks in co ela ions, wi h
a majo s uc u al b eak occu ing a ound he pandemic ou b eak. The esul s sugges
ha in e ac ions be ween exchange a es and oil p ices ha e inc eased pos -pandemic.
Policymake s and in es o s esponded o he c isis by adjus ing po olios, a o ing o eign
cu ency-denomina ed asse s when domes ic cu encies a e dep ecia ed.
While p e ious s udies ha e employed a ious me hodologies o analyze in la ion
d i e s, his s udy u ilizes a s uc u al ec o au o eg essi e (SVAR) model and mul iple
Economies 2025,13, 102 15 o 18
4.4. G ange Causali y Tes s
In o de o alida e he esul s o he SVAR model and he eg ession analysis, his
s udy also ca ied ou G ange Causali y Tes s. The es ima ed esul s o he G ange
Causali y Tes o he pe iod om Janua y 2020 o Augus 2024 a e p esen ed in Table 5.
Table 5. Resul s o he G ange causali y es (Sample pe iod: 2020M01–2024M08).
Null Hypo hesis Numbe o
Obse a ions F-S a is ic p-Value
MS does no G ange cause INF 54 9.701 *** 0.0003
INF does no G ange cause MS 0.447 0.6419
EXR does no G ange cause INF 54 25.143 *** 0.0000
INF does no G ange cause EXR 0.650 0.5267
OP does no G ange cause INF 54 0.269 0.7654
INF does no G ange cause OP 1.971 0.1502
SC does no G ange cause INF 54 2.643 * 0.0967
INF does no G ange cause SC 0.510 0.6039
PR does no G ange cause INF 54 3.274 ** 0.0463
INF does no G ange cause PR 0.580 0.5638
UN does no G ange cause INF 54 1.043 0.3601
INF does no G ange cause UN 1.493 0.2348
No e: This able shows he esul s o he G ange Causali y es (G ange ,1969,1988). INF is he in la ion a e, MS
is he pe cen age change in money supply, EXR is he pe cen age change in he nominal exchange a e, OP is he
pe cen age change in global oil p ice, SC is he change in global supply chain p essu e index, PR is he change
in policy a e, and UR is he change in he unemploymen a e. The as e isks ***, ** and * indica e he s a is ical
signi icance o F-s a is ic a he 1%, 5%, and 10% le els o signi icance, espec i ely.
The esul s p esen ed in Table 5show ha he e is a unidi ec ional causali y unning
om money supply o in la ion, exchange a e o in la ion, he global supply chain p essu e
index o in la ion, and policy a e o in la ion, du ing he pe iod om Janua y 2020 o
Augus 2024. Thus, he esul s o he G ange causali y es s ind e idence o claim ha
money supply, exchange a e, global supply chain p essu e, and policy a e con ibu ed o
he in la ion in S i Lanka du ing he pe iod om Janua y 2020 o Augus 2024.
5. Conclusions
In his pape , we con ibu e o he eme ging empi ical li e a u e dealing wi h he
d i e s o in la ion in a small open economy. The objec i e o his s udy is o in es iga e
he d i e s o in la ion in S i Lanka using a s uc u al ec o au o eg essi e model and a
mul iple eg ession model. The s udy assesses bo h he global d i e s and he domes ic
d i e s o in la ion. The s udy uses mon hly da a on in la ion a es, global oil p ices,
exchange a es, money supply, unemploymen a es, he global supply chain p essu e
index, and policy a es, co e ing he pe iod om Janua y 2020 o Augus 2024.
Based on he esul s o he SVAR model, we can ind e idence o conclude ha changes
in he in la ion a e in S i Lanka we e mainly d i en by he g ow h a es in money supply,
exchange a es, and global supply chain dis up ions du ing he 2020–2024 pe iod.
The esul s o he eg ession analysis sugges ha he g ow h in money supply, g ow h
a e o exchange a e, global supply chain p essu e, and policy a e a iables a e he mos
impo an con ibu o s o changes in he in la ion a e du ing he 2020–2024 pe iod. The
esul s o he eg ession analysis o he pe iod Janua y 2020 o Augus 2024 a e consis en
wi h hose o he SVAR model.
The esul s o he G ange causali y es s show ha he e is a unidi ec ional causali y
unning om money supply o in la ion, exchange a e o in la ion, he global supply chain
p essu e index o in la ion, and policy a e o in la ion, du ing he pe iod om Janua y 2020
o Augus 2024. Thus, we ind e idence o claim ha money supply, exchange a e, global
Economies 2025,13, 102 16 o 18
supply chain p essu e, and policy a e con ibu ed o he in la ion in S i Lanka du ing he
pe iod om Janua y 2020 o Augus 2024.
Consis en wi h he global impac s on in la ion, p e ious s udies (e.g., Jiang e al.,
2022) emphasize ha in la iona y p essu es a e no jus d i en by domes ic ac o s bu
a e also signi ican ly in luenced by ex e nal dis up ions, including global supply chain
dis up ions and exchange a e luc ua ions. The link be ween money supply g ow h and
in la ion, as ound in his s udy, mi o s indings om s udies such as Makin e al. (2017),
whe e excess money supply g ow h was iden i ied as a key de e minan o in la ion. The
impac o exchange a e luc ua ions on in la ion in S i Lanka is consis en wi h indings
om Chowdhu y and Ga g (2022), who iden i ied signi ican shi s in in la ion due o
exchange a e mo emen s, especially du ing pe iods o heigh ened economic unce ain y.
The ole o policy a es in con olling in la ion, as obse ed in his s udy, aligns wi h he
wo k o Basse and Wegene (2022), who ound ha sho - e m in e es a e adjus men s can
signi ican ly in luence in la ion expec a ions.
The indings o he s udy unde h ee di e en s a is ical analyses used p o ide
consis en esul s. The indings o he s udy show some impo an policy implica ions.
In o de o a oid a simila episode o high in la ion, policymake s should no allow any
apid inc ease in he money supply. In addi ion, i is also equally impo an o main ain a
ela i ely s able exchange a e.
Au ho Con ibu ions: Concep ualiza ion, E.M.E. and P.M.A.L.D.; me hodology, E.M.E.; so wa e,
E.M.E.; alida ion, E.M.E. and P.M.A.L.D.; o mal analysis, E.M.E.; in es iga ion, E.M.E.; esou ces,
E.M.E. and P.M.A.L.D.; da a cu a ion, E.M.E.; w i ing—o iginal d a p epa a ion, E.M.E. and
P.M.A.L.D.; w i ing— e iew and edi ing, E.M.E. and P.M.A.L.D.; isualiza ion, E.M.E. and P.M.A.L.D.;
supe ision, E.M.E.; p ojec adminis a ion, E.M.E. All au ho s ha e ead and ag eed o he published
e sion o he manusc ip .
Funding: This esea ch ecei ed no ex e nal unding.
Ins i u ional Re iew Boa d S a emen : No applicable.
In o med Consen S a emen : No applicable.
Da a A ailabili y S a emen : Da a will be made a ailable on eques om he au ho .
Con lic s o In e es : The au ho s decla e no con lic s o in e es .
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