Stock Market Development and Economic Growth: Empirical Evidence from Sri Lanka

Abstract

The financial markets have played a crucial role in the country's economic life for a long time. The objective of this study was to examine the empirical relationship between stock market development and economic growth in Sri Lanka. This study used annual time series data for the period from 1990 to 2018 which were collected from the annual reports of the Colombo Stock Exchange (CSE) and the Central Bank of Sri Lanka. The data were analyzed employing co-integration test, and vector error correction model (VECM). The results of VECM revealed that stock market capitalization, foreign direct investment, and inflation have a significant impact on economic growth, while turnover has not significantly influenced economic growth. The findings of the study have an important implication for the economic policymakers and government of Sri Lanka to enhance economic growth. Further, research can be extended by choosing more periods of data and choosing other indicators of stock market development indicated in previous studies.