Would Keynesian Expansionary Policies Eliminate the Natural Rate of Unemployment: Insights from The Sri Lankan Economy

Would Keynesian Expansionary Policies Eliminate the Natural Rate of Unemployment: Insights from The Sri Lankan Economy | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Would Keynesian Expansionary Policies Eliminate the Natural Rate of Unemployment: Insights from The Sri Lankan Economy Houssam BOUGHABI This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-7466646/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract This paper develops a Keynesian stochastic framework to reassess the natural rate hypothesis in the context of the Sri Lankan economy. By embedding fractional Brownian motion to capture persistent inflationary shocks and incorporating nonlinear interactions between unemployment dynamics and aggregate demand, the model contrasts expansionary Keynesian policies with the monetarist view of structural unemployment. Empirically, the estimated income series indicates that targeted income interventions can systematically reduce unemployment over time, illustrating the capacity of demand-side policies to stabilize labor markets. The results suggest that fiscal and monetary measures, when sustained and coordinated, not only mitigate hysteresis effects but can also shift unemployment away from the so-called natural level, reaffirming the Keynesian insight that active policy can shape real economic outcomes even in the presence of structural frictions. This study contributes both theoretically to macroeconomic stabilization debates and practically to policy design in economies facing recurrent shocks and structural vulnerabilities. JEL Classification. E24, E32, E62, O53 Macroeconomics Keynesian macroeconomics natural rate hypothesis unemployment dynamics income stabilization Sri Lanka Full Text Additional Declarations The authors declare no competing interests. Supplementary Files Pythoncode.docx The model Python Code Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. 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Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-7466646","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":506079716,"identity":"b9aad832-4eb1-437b-81b7-24f3a769c2ba","order_by":0,"name":"Houssam BOUGHABI","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAAA9ElEQVRIiWNgGAWjYBACAwYeEHWAwYCZ+cABUrWwJZCqhYHHgDiHmTPwHnzM8+uOvDk7z8fDBX9s5BnYDz9gulGDW4tlA1+yMW/fM8OdzbwbDs9sSzNs4EkzYM45hsdhB3jMpHl7DjNuOAzUwttwmLGBIYeBOYeNsBb7DYd5Hhzm+fPfvoH/DVDLPwJaeH4cTgRqYTjMw3YgsUECaEtuGx4th/mSDec2HE7e2cxmcJi3LTm5TeKZweHcPjxajvcefPDmz2Hb7fyHH3/m+WNn28+f/PBxzjfcWhiYgZgR2Rkgjx/AowEK/hBWMgpGwSgYBSMYAABudFObf+hDdwAAAABJRU5ErkJggg==","orcid":"https://orcid.org/0009-0005-3492-1910","institution":"National Institute of Statistics and Applied Economics","correspondingAuthor":true,"prefix":"","firstName":"Houssam","middleName":"","lastName":"BOUGHABI","suffix":""}],"badges":[],"createdAt":"2025-08-27 00:46:19","currentVersionCode":1,"declarations":{"humanSubjects":false,"vertebrateSubjects":false,"conflictsOfInterestStatement":false,"humanSubjectEthicalGuidelines":false,"humanSubjectConsent":false,"humanSubjectClinicalTrial":false,"humanSubjectCaseReport":false,"vertebrateSubjectEthicalGuidelines":false},"doi":"10.21203/rs.3.rs-7466646/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-7466646/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":90283985,"identity":"d9ae346d-28dd-4db1-b2bb-83bfdf2a9ce2","added_by":"auto","created_at":"2025-09-01 05:45:15","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":357836,"visible":true,"origin":"","legend":"","description":"","filename":"Article6.pdf","url":"https://assets-eu.researchsquare.com/files/rs-7466646/v1_covered_61108a27-45af-4b5a-88c8-34b8ad5fa63b.pdf"},{"id":90283600,"identity":"74f2acf4-bbc9-494b-92b9-8ef5d766005d","added_by":"auto","created_at":"2025-09-01 05:37:14","extension":"docx","order_by":1,"title":"","display":"","copyAsset":false,"role":"supplement","size":17917,"visible":true,"origin":"","legend":"\u003cp\u003eThe model Python Code\u003c/p\u003e","description":"","filename":"Pythoncode.docx","url":"https://assets-eu.researchsquare.com/files/rs-7466646/v1/27f7ef8f5dc13cdd1ffce255.docx"}],"financialInterests":"The authors declare no competing interests.","formattedTitle":"\u003cp\u003eWould Keynesian Expansionary Policies Eliminate the Natural Rate of Unemployment: Insights from The Sri Lankan Economy\u003c/p\u003e","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":true,"hideJournal":true,"highlight":"","institution":"National Institute of Statistics and Applied Economics","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Keynesian macroeconomics, natural rate hypothesis, unemployment dynamics, income stabilization, Sri Lanka","lastPublishedDoi":"10.21203/rs.3.rs-7466646/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-7466646/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eThis paper develops a Keynesian stochastic framework to reassess the natural rate hypothesis in the context of the Sri Lankan economy. By embedding fractional Brownian motion to capture persistent inflationary shocks and incorporating nonlinear interactions between unemployment dynamics and aggregate demand, the model contrasts expansionary Keynesian policies with the monetarist view of structural unemployment. Empirically, the estimated income series indicates that targeted income interventions can systematically reduce unemployment over time, illustrating the capacity of demand-side policies to stabilize labor markets. The results suggest that fiscal and monetary measures, when sustained and coordinated, not only mitigate hysteresis effects but can also shift unemployment away from the so-called natural level, reaffirming the Keynesian insight that active policy can shape real economic outcomes even in the presence of structural frictions. 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