The research aims to study the impact of financial liberalization on broad money in Sri Lanka during the period 1977-2011.Financial liberalization index was calculated for evaluation the complex process of financial liberalization in Sri Lanka by focusing on important changes in the financial sector. The study has used ten major policy components of financial liberalization to construct financial liberalization index at a particular time. In order to derive the index, Principle Component Method is employed. Impact of financial liberalization on broad money is examined by using computed index and other related variables for money demand in economics literature. The study reveals that there is a positive relationship between broad money and financial liberalization in Sri Lanka in the short run. Therefore, this study opens the door to examine whether financial liberalization positively impacts on broad money in Sri Lanka in the long run as short run. Keywords: Financial liberalization, broad money, Principal Component analysis.
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