Abstract:
The impact of monetary and fiscal policy fluctuations on output has been a prominent area on
macroeconomic policy and satiability of the economy. Thus, this study aimed to investigate the
impact and role of monetary and fiscal policy shocks in affecting Ethiopian macroeconomic
fluctuations using the annual time series data for the period of 1991 to 2022. The study used
quantitative research approach, and the data was collected from annual reports of National bank
of Ethiopia (NBE) for monetary policy variables and other control variables, and Ministry of
Finance and Economic Cooperation (MoFEC) for fiscal policy variables and from world bank
data base. To analyze the data, the study adopted structural VAR model to compute variance
decompositions and impulse response functions. The results of unit root test show that all
variables are stationary at 1st difference with trends, and trend and intercept at 95% confidence
level. Johansen trace and maximum eigenvalue statistic shows that there is a long run
equilibrium relation between the variables at the 1% level of significance. The causality test
results suggest that real GDP, Real effective exchange rate and trade openness showed
bidirectional causality while Consumer price index, gross capital formation, government
expenditure, interest rate and tax revenue, total labor force, and Broad money supply shows
unidirectional causality. The study concluded that, even though the results of variance
decompositions and impulsive response function displayed that monetary policy shocks are
relatively more important than fiscal policy shocks in affecting economic growth of Ethiopia, both
policies have effective impact on economic growth (real GDP) determinations. Therefore, the
study suggested that the government of Ethiopia should use an effective monetary and fiscal
policy mix to reduce the rate of inflation and to bring stable economic growth of the country.
