Fiscal Policy and Economic Growth in Ethiopia

Abstract

The purpose of the paper is to examine the impact of fiscal policy variables on economic growth for Ethiopia over the period 1974/75 – 2013/14, a period spanning 40 years. The fiscal policy variables considered components of government expenditure, revenue, and budget balance. To serve the objectives of the study Johnson’s Co integration test, VAR and VECM approaches are employed. The study result indicates that, economic growth and fiscal policy variables have long run relationship. Moreover the capital expenditure, direct tax and budget balance have positive relationship with economic growth in the long run. The main finding other tax has   significance and positive    impact on the country’s economic growth, In the short run, the error correction term come up with the expected sign and 43% of disturbances corrected each year. Based on the findings the study highlights some policy issues that policy makers should due attention.

Key words : fiscal plicy ,economic growth , VAR  model