Does Economic Freedom Matter for Growth? (Empirical evidence from Sri Lanka)

Abstract

This study aims to examine whether economic freedom matter for economic growth in Sri Lanka using the annual time series data over the period 1996-2020. Exploratory data analysis and inferential data analysis techniques were employed as the analytical tools. The exploratory data analysis indicates a positive relationship between economic freedom and economic growth, the unit root tests confirm that the variables are I(1), the ARDL Bounds cointegration test finds a long run relationship between the variables, the long-run estimated coefficient of variables used in this study point out that the key variable of economic freedom is statistically significant and positively different from zero, the estimated coefficient of error correction term implies that the response variable of economic growth moves towards the long-run equilibrium, the Granger causality test shows a one-way causality running from economic freedom to economic growth. The impulse response function analysis indicates that a positive shock to economic freedom has an immediate significant positive impact on economic growth.