Economics

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Browsing Economics by Author "Abdi, Jemal"

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    Government Budget Defect, Money Supply, Inflation and Policy Implication
    (Addis Ababa University, 2007-08) Abdi, Jemal; Hassen, Seyd (PhD)
    The objective of the study is to examine the causal relationship between budget deficit , Money supply and Inflation in Ethiopia. Aghevli and Khan(1978) model was used in analyzing the Ethiopian annual data from 1974-2005. In the model there are two period of analysis :period I from 1974-1991 where there is regulation of wages and prices and period II from 1992-2005 where there is structural adjustement programs at the beginning of the period and free market economy used as state’s policy. Instrumental Variables(Two-Stage Least Squares) estimation methods was used to analyse the short-run dynamics and long run relationships among budget deficit, Money Supply and Inflation. The Findings of the study are: In period I inflation is significant in the explanation of current price level ,the coefficients of Government Expenditure,Government Revenue equations are insignificant in the short-run .Thus we only draw conclusion and policy recommendation based on the equation of period II . Two-way causation between money supply and inflation was demonstrated. Government expenditures adjust faster than revenue ,as the mean lag of government expenditure is less than the mean lag of government revenue,that is,during inflation the real revenue fall faster than real government expenditures due to long lags in the collection of taxes. The monetarist paradigm of sustained inflation resulting from budgetary deficit is empirically confirmed.The policy implication is that without emplementing effective monetary and fiscal policies,it is difficult to see macroeconomic stability and good economic performance in the country. As a recommendation ,the Minitry of Finance and Economic Development,Ministry of Revenue and National Bank of Ethiopia should coordinate their effort to impelement the monetary and fiscal policies to reduce the larege budget deficit,control the inflation and reduce lags in the collection of taxes,improving tax performce and efficiency in tax administration.