State Space Model for Evaluating the Causal Impact of Outward-Looking Policy on the Growth Rate in Sri Lanka

Abstract

The study examines the causal impact of the outward-looking policy in 1978 on the economic growth rate in Sri Lanka. The secondary data is used to estimate the impact of trade liberalization policy from 1970 to 2007. In estimating the impact of the policy, the total period is divided into two sub-period of pre-period as before the implementation of open economic policy during 1970-1977 and post-period as after the implementation of open economic policy during 1978-2007. The study applies the State Space Local Level trend model with the seasonal component. The empirical results suggest that there is a positive impact of the outward-looking policy reforms on the economic growth rate in Sri Lanka. The GDP growth rate has been recording a higher value than the inward-looking policy period.