The Relative Effects of Fiscal and Monetary Policies on Ethiopian Economic Growth

Abstract

The purpose of this paper is to investigate the relative effect of monetary policy and fiscal policy on economic growth in Ethiopia. The paper employed annual time series data from a period of 2009 to 2019. The paper performed Augmented Dickey-Fuller test for unit root, Johansson test of co-integration and Ordinary Least Squares estimation technique to analyze the data. The findings revealed that monetary policy proxy by interest rate has significantly a negative effect on the Ethiopian economic output. Likewise, the study found that fiscal policy proxy by government expenditure has significantly and positively influenced the economic growth (GDP) in Ethiopia. Finally, the study exposed that fiscal policy is somewhat influential than monetary policy in altering economic growth of Ethiopia. The study suggested that both fiscal and monetary policies should be implemented simultaneously to ensure macroeconomic stability and sustainable economic growth in Ethiopia. It is also recommended that government annual budget and projects implementation should be monitored adequately to ensure price stability, full employment, and economic growth. Monetary policies implemented by the National Bank of Ethiopia should promote conducive investment atmosphere through appropriate stabilization of interest rates, and inflation rates to promote economic growth of the country.

DOI: 10.7176/PPAR/10-11-01

Publication date: November 30^th 2020