The Relationship between Budget Deficit and Economic Growth: Evidence from Ethiopia
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Date
2021-06
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A.A.U
Abstract
This study examined the relationship between budget deficit and economic
growth of Ethiopia using time series data for the period 1991 to 2019 by ap-
plying the ARDL bounds testing approach. The empirical results indicate that
budget deficit and economic growth in Ethiopia have a negative relationship in
the long run, and have a weak positive association in the short run. A one
percent increment in the budget deficit causes 1.43 percent decreases in the eco-
nomic growth of the country. This result is consistent with the neoclassical view
which says budget deficit is bad for economic growth during stimulating periods.
Moreover, in the long run, both variables trade openness and inflation have a
positive impact on Ethiopian economic growth, and on the other hand, the eco-
nomic growth of Ethiopia is negatively affected by the nominal exchange rate
in the long run. Apart from this, in the long run, gross capital formation and
lending interest rates have no significant impact on the economic growth of the
country. Therefore, the study recommends the government should manage its
expenditure and mobilize the resources to generate more revenue in order to
contain the impact of budget deficit on economic growth.
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Keywords
Budget deficit, Economic growth, ARDL bounds