An Empirical Investigation on Monetary and Fiscal Policy Interaction in Ethiopia
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Date
2014-06
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Addis Ababa University
Abstract
To ensure sustainable growth, the interaction of monetary and fiscal policies- the two major macroeconomic policies- is paramount important. With the objective of investigating the interaction between fiscal and monetary policies on Ethiopian economy, the study used Vector Auto Regression (VAR) framework to compute impulse response and variance decomposition. Both trace and maximum Eigen value tests prove the existence of two co integrating vectors. The finding of the paper reveals that only fiscal policy proxied by government expenditure respond positively to a shock in money supply as a proxy of monetary policy which implies complementarity between the policies. But, monetary policy failed to react for the shocks of fiscal policy. Regarding with the adjustment of the model, all variables except that for GDP have at least one significant coefficient.
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Fiscal Policy Interaction