Relative Effectiveness of Fiscal and Monetary Policy Shocks on the Ethiopian Economic Growth: A Structural Vector Autoregressive Model
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Abstract
Shocks on fiscal and monetary policies affect the economic growth of countries either positively or negatively. The objective of this paper was to examine the relative effectiveness of fiscal and monetary policy shock on the Ethiopian economic growth. To examine the dynamic effects of fiscal and monetary policy shocks on the Ethiopian economic growth Structural Vector Autoregressive model was employed for seasonally adjusted quarterly data from 1991Q1 up to 2016Q1. Short-run recursive identification or Cholesky identification technique was used to identify structural shocks in the SVAR model. The result of impulse response and variance decomposition shows that both fiscal and monetary policy shocks have a positive effect on the Ethiopian economic growth. However, fiscal policy shocks are more effective than monetary policy shocks in boosting Ethiopian economic growth. Specifically, government expenditure is most effective followed by government tax revenue in enhancing Ethiopian economic growth.
Keywords
Fiscal policy Shock, Monetary policy Shock, SVAR, IRFs, the Ethiopian economy
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