Fiscal Policy and Financial Development in Sri Lanka

Abstract

A large literature has examined the relationship between financial development and economic growth. However; limited work has been done on the macroeconomic determinants of financial development. This paper examines how fiscal policy contributes to financial deepening particularly giving attention on commercial banks in Sri Lanka. The analysis of the study employs deductive research approach. The study draws conclusion, that public borrowing from commercial bank and government expenditure has more significant positive impact on financial development in Sri Lanka. But, it is not possible to ignore the potential threat from crowding out effect on financial intermediation. This result is confirmed by previous empirical studies and it provides evidence on safe assets view of financial development.

Keywords: Fiscal Policy, Financial Development, Public Borrowing, Government Expenditure

JEL Classification: E62, G21, H60