The Impact Of Fiscal And Monetary Policies Shocks On Ethiopian Economy: Time Series Analysis

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.