Financial Liberalization and Performance in Sri Lanka

From the 1950s to the early 1970s, Sri Lankan governments pursued controls on the financial sector and have further reduced controls since 1977. This article links those financial sector reforms (falling controls) and the financial sector performance of Sri Lanka by testing hypotheses estimating cointegration with the ordinary least square (OLS)-based auto regressive distributed lag (ARDL) approach. Results show limited support for the liberalization and efficiency hypotheses that falling controls are associated with widening the financial sector and motivating investments. Results provide no support for the hypotheses that falling control is associated with deepening and improving the financial sector.