The Dynamic Effects of Fiscal Policy Shocks on Macroeconomic Variables in Ethiopia: Evidence from (SVAR) Model
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Date
2019-06
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Addis Ababa University
Abstract
This paper investigates the dynamic effects of fiscal policy shocks on macroeconomic variables
in Ethiopia using SVAR and VECM approach on quarterly data for the period 2000/01Q1-
2016/17Q4. From the empirical findings, the response of macroeconomic variables is asymmetrical
depending on the aggregate and disaggregate components of fiscal policy variables.
Basically, a positive shock to government spending was found to have a positive effect on output
but at the cost of higher inflation,and has delayed positive effect on the interest rate. In
line with the theory, the response of output to positive innovations of tax revenue was found
negative in the short run and long run. Consequently, a positive shock to tax revenue has
a positive effect on inflation and interest rate. For the subcategory of government spending
–similar to total government spending a positive shock to recurrent spending has a positive
effect on inflation and output in the short run. However, in the long run the effect of recurrent
spending on inflation was insignificant. In addition, the response of interest rate is negative
to a positive recurrent spending shock in the short run and insignificant in the long run. In
contrast to recurrent spending shock, a positive shock in capital spending has a positive effect
on output in the short run. However, it is insignificant. The reason could be the mismanaged
and corrupted capital projects which contribute to inflationary pressure in the short run. However,
in the long run the effect of capital spending on output is positive and significant and also
does not lead inflation. Similar to recurrent spending positive innovations of capital spending
has a negative effect on the interest rate in the short run. However, in the long run the effect
of recurrent spending on interest rate was insignificant. Whereas, the effect capital spending
was negative on the interest rate which result in crowding in private investment. In the case
components of tax revenue, a positive shock to indirect tax has a negative effect on output in
both in the short run and long run. Similar to the total tax revenue shock, a positive shock
to indirect tax has a positive effect on interest rate and inflation in the short run. However,
the effect of indirect in the long run on inflation was negative. On the other hand, a positive
shock to direct tax has a persistent positive effect on output and has delayed positive effect on
interest rate and inflation in the short run. Consequently,
Description
A thesis submitted in Partial fulfillment of the requirements for the degree of
Masters in Economics(Economic Policy Analysis)
Keywords
Capital spending, Direct tax, Fiscal policy, Total government spending