Kumari U. W. B. M.Vinayagathasan T.Abayasekara C. R.2025-11-122025-11-122014Peradeniya Economics Research Symposium (PERS) -2014, University of Peradeniya, P 55 - 60https://ir.lib.pdn.ac.lk/handle/20.500.14444/6476Introduction : Financial development is considered by many economists to be of paramount importance for economic growth. A large number of studies have focused on the theoretical and empirical relationship between financial development and economic growth. Schumpeter (1934) highlighted how financial institutions could actively induce innovation and future growth by identifying and funding productive investments. Government restrictions on the banking system such as interest rate ceilings and directed credit would negatively affect the development of the financial sector and harm economic growth (McKinnon and Shaw, 1973). While a considerable body of empirical literature confirmed a positive relationship (Ayadi et al., 2013; Estrada et al., 2000; Levine, 1997; and Goldsmith, 1969) some other literature suggests a negative association (Shan et al., 2001; Demetriades and Hussein, 1996; and Neusser and Kugal, 1996) between financial development and economic growth. In the Sri Lankan case, Perera and Paudel (2009) using 1955- 2005 data, found two-way causality between broad money and economic growth but, they found little evidence that financial development boosts economic growth. Amarathunga (2010) found that economic growth causes financial development in the long-run and there is no reverse causation. The above studies on Sri Lanka covered the transition period of the economy. The post-1977 reforms included financial liberalization with its accompanying dramatic changes in the structure, market and instruments in the financial system. It is likely that changes in the financial development – economic growth nexus before and after 1977 would impact on the empirical results obtained therein. Therefore this study attempts to investigate the impact of financial development on economic growth of Sri Lanka after liberalization of the economy.en-USFinancial DevelopmentEconomic GrowthLiberalizationArticle