Government Budget Defect, Money Supply, Inflation and Policy Implication
No Thumbnail Available
Date
2007-08
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Addis Ababa University
Abstract
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.
Description
Keywords
Government Budget Defect