Simulation experiments for public spending policies in Sri Lanka

Abstract

This paper examines the economic impact of government spending policies in Sri Lanka. For simulation experiments, the paper uses a macro-econometric model developed by Jayawickrama (2006) for Sri Lanka on annual data from 1978 to 2005. The model is simulated to find the impact of government consumption, investment and transfer payment spending policies. Results reveal that while decreases in government consumption expenditure and transfer payments leave many macro variables unchanged, low government investment spending policies have significant negative impacts on the economy. Though government consumption expenditure and transfer payments cuts lower fiscal deficit markedly, low government investment expenditure would result in higher fiscal deficits as it triggers an economic recession.