Macro-econometric Modelling of Ethiopian Economy and its Policy Implication: An Eclectic Approach
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Date
2011-11
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Addis Ababa University
Abstract
The paper presents a small macroeconometric model by categorizing the working of the economy in to aggregate demand, aggregate supply, monetary sector, and price sector. The model is estimated using data from 1970/71 to 2008/09 employing an eclectic approach, the Engle-Grager two step procedure and Autoregressive Dynamic lag Model (ARDL) approach of Pesearan et al (2001) to obtain the cointegrating relations and short run dynamic model. The construction of the model follows the lines of aggregate supply - aggregate demand framework. The adequacy of the model and its forecasting accuracy is checked using MAE, MAPE, RMSPE and Theil’s inequality coefficients. And the model is found to track endogenous variables well for the given sample period. Policy simulation using the dynamic simulation method compares the dynamic responses to the fiscal policy in the form of expansionary government has an expansionary effect on domestic output, however followed by inflation and crowding out of private investment. The other simulation is a monetary restraint policy in the form of reducing domestic credit is effective to alleviate inflation and improve the trade balance though it is less effective to increase domestic output. Ethiopian economy is found to be highly susceptible to external shock and an increase in imported price level results a contraction in domestic output and creates inflation in domestic economy and a reduction in both export and import level of the country.
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Macroeconometric Modelling of Ethiopian Economy