14. An Empirical Study on the Impact of Political Shocks and Other Macroeconomic Variables on GDP of Sri Lanka

Over the last two to three decades, a wide range of researchers has examined the determinants of economic growth using different methodologies. In the context of developing countries, political shocks and instabilities are found to be a major determinant of economic growth. Thus the main objective of this study is to examine determinants of real gross domestic product (RGDP) with a special reference to political instability, which is a less examined phenomenon in the local and international literature. The study employed secondary data from 1971 to 2016. RGDP was considered as the dependent variable, and foreign direct investment, inflation, population growth, fixed domestic capital formation, trade openness, political instability and the introduction of the open economy concept have been considered as explanatory variables. The regression results indicate that gross fixed capital formation, foreign direct investment and the introduction of the open economy in 1977 had a statistically significant strong positive impact on real GDP. Population growth rate, inflation and political instability were found to have no significant impact on Sri Lanka’s RGDP. These findings have significant policy implications.