A VAR Model Approach for Analysing Causative Association between Sri Lankan Economy and the Components of Economy
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The major perception for every emerging state such as Sri Lanka, is to touch excessive economic growth. This study inspects the causal association among Gross Domestic Product (GDP) which is the monetary measure of a country’s economy and its three components, agricultural (primary component), industrial (secondary component) and services sectors (tertiary component) in Sri Lanka, established on the annual time series data for the period of 1960 – 2017 obtained from the Annual Report of World Bank Economic Indicators and Annual Report of Central Bank of Sri Lanka. For this motive, Augmented Dickey Fuller unit root test was involved to test the stationarity of the four variables and they have been found stationary at first differences. The least information criterions were used to estimate the optimum lag length. The presence of the long run association between the GDP and the three components were examined using the Vector Autoregressive (VAR) Cointegration test. Then the Engle-Granger causality/block exogeneity Wald test, Impulse Response and Variance Decomposition analysis were supported out and the significances displayed two-way Granger causality from agricultural sector to economy and service sector, two-way Granger causality from agricultural sector to industrial sector and from industrial sector to both GDP and service sector. This is an predictable concern for every emerging country wherever the agriculture is answerable for a countless proportion of nationwide economic growth. Therefore the suitable commendations were proposed. The major perception for every emerging state such as Sri Lanka, is to touch excessive economic growth. This study inspects the causal association among Gross Domestic Product (GDP) which is the monetary measure of a country’s economy and its three components, agricultural (primary component), industrial (secondary component) and services sectors (tertiary component) in Sri Lanka, established on the annual time series data for the period of 1960 – 2017 obtained from the Annual Report of World Bank Economic Indicators and Annual Report of Central Bank of Sri Lanka. For this motive, Augmented Dickey Fuller unit root test was involved to test the stationarity of the four variables and they have been found stationary at first differences. The least information criterions were used to estimate the optimum lag length. The presence of the long run association between the GDP and the three components were examined using the Vector Autoregressive (VAR) Cointegration test. Then the Engle-Granger causality/block exogeneity Wald test, Impulse Response and Variance Decomposition analysis were supported out and the significances displayed two-way Granger causality from agricultural sector to economy and service sector, two-way Granger causality from agricultural sector to industrial sector and from industrial sector to both GDP and service sector. This is an predictable concern for every emerging country wherever the agriculture is answerable for a countless proportion of nationwide economic growth. Therefore the suitable commendations were proposed.
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