Macroeconomic Stability Implications of GTP-II: Evidence from Macro -Econometic Model for Ethiopian Economy
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Date
2016-11
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Addis Ababa University
Abstract
This study tries to use a macro econometric model for policy analysis purpose of the Second
Growth and Transformation Plan. First the macro-econometric model is developed for Ethiopian
economy based on aggregate supply and aggregate demand framework. The model is composed
of total 65 equations, out of which 12 equations are estimated equations and the rest are either
identity or bridging equations. After the model is developed, how it performs with historical data
is checked by performing dynamic simulations for the sample period 2000-2014 and it has
performed well in tracing historical values. After the model performs well with historical data it
is used to simulate for the two scenarios of the Second Growth and Transformation Plan: the
increase in the government investment by 10 percent and an external shock which is an increase
in import price by 10 percent. When the government investment increases by 10 percent, it has
an increasing impact on the output of the economy. On the other hand, it creates an inflationary
pressure. This shows that it may have a macroeconomic instability problem. When the import
price increases by 10 percent, it has a negative impact on the output of the economy and also
leads to an inflationary pressure. But the inflationary pressure that comes from the increase in
the public investment is higher and leads to more macroeconomic instability problem. To avoid
or minimize the instability problems that arise from these policy shocks the government should
be cautious and take preventive actions accordingly. In general, the Second Growth and
Transformation Plan has to be undertaken in a matter of which its effect on the economy’s
stability is minimal and the government should follow different measures to avoid the worst
scenario
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Keywords
Growth and Transformation Plan, Economic Policy Analysis