An econometrics analysis of the relationship between the nominal money supply, national output and the general price level of Sri Lanka

Abstract

The complex and highly interrelated nature of the relationship between Money supply, National Output and Inflation has drawn considerable attention of the interested parties since the period of economic importance. Number of economists from various parts of the world has contributed in varying degrees in determining the underlying relationship between these economic concepts. Given the complexity of the problem of present inflation there is diversity of competing theories of inflation. Economists' view is that these theories are interrelated and not mutually exclusive. Keynesians emphasize the role of aggregate expenditure on the general price level. According to them an increase in aggregate expenditure increases output until full employment is reached and prices rise when there is aggregate excess demand and continue to increase until it equals full employment money expenditure. The structuralist school of inflation explains inflation in the less developed countries in a different way. To structuralists the problem of inflation was to be viewed from the context of the structural composition of the economy, the basic underlying cause of inflation being the all pervading pressure of economic growth on an under developed social and economic structure, a process or a series of processes making inflation difficult to avoid.