Fiscal Policy and Economic Growth: Empirical Evidence from Ethiopia
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Date
2010-07
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A.A.U.
Abstract
The purpose of the paper is to exam ine the effect of fi scal policy variables on economiC
growth in Ethiopia using annual data over the period 1960/61-2007/08. To ach ieve the stated
obj ective "Barro type" growth model is estimated with the aid of cointegrated Vector
autoregressive (V AR) and error correction modelling techn iques. This paper decomposes
public spendi ng and revenues into various subcategories and estimates the impact of each of
them on economic growth.
The result SUppOlt growth neutral nature of nondistortionary taxes and total recurrent
expenditures excluding health and education spending. Strong positive effect of human capital
development expenditure was ascertained. There was evidence that shifting the government
revenue source from distortionary taxation towards non di stortionalY taxes can enhance real
per capita GDP. Government investment, on the other hand, revealed a short run beneficiary
effect being unimportant in the long run. In light of this, the study proposes that in the quest
for sustainable growth in Ethiopia, fiscal policy should be designed so that government
expenditure is focused in increasing human capital development with limiting government
investments in areas which are not complementary for the private sector.
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Keywords
Fiscal Policy and Economic Growth, Empirical Evidence from Ethiopia