Impact of Government Expenditure Shock on Private Investment in Ethiopia: A Recursive Dynamic CGE Analysis

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Addis Ababa University


Ethiopian government targeted sustainable economic growth with stable macroeconomic environment through expanding government expenditure, revenue and private investment. But the relationship between government spending and private investment is source of controversy in both theoretical and empirical perspective. This study examines the impact of government expenditure specifically (human capital, electricity and public consumption) shock on private investment using a recursive dynamic CGE model with the recent SAM of the country. To see the impact of each categories of spending we use four source of finances which include shift of resource from public administration, tax, foreign saving and tax and foreign saving for both human capital and electricity spending but one source which is tax for public consumption spending. Under all sources of finance, human capital and electricity spending exert positive impact on variables under consideration including private investment which easily reconciled with Keynesians argument. But the size of impact of each spending under each source is different. Both human capital and electricity financed via foreign saving bring a greater positive impact on private investment in Ethiopia. In contrast to this, public consumption financed via tax imposes negative impact on all variables including private investment which can be reconciled with neoclassical view. Therefore, financing human capital and electricity spending via foreign saving and decreasing public consumption is sound to bring private investment to desired place in the country Key words: Government expenditure, Private Investment, SAM, CGE



Government expenditure, Private Investment, SAM, CGE