Guta, Fantu (PhD)Abebe, Daniel2018-07-032023-11-042018-07-032023-11-042012-12http://etd.aau.edu.et/handle/123456789/5666The Ethiopian economy has recorded an impressive growth performance for nearly a decade. The government has had a substantial and persistent size in the economy over these years. The dynamic effect of fiscal policy on macroeconomic variables is, however, far from being obvious. The objectives of this study are, therefore, to empirically characterize the dynamic effects of net government spending, net tax revenue as well as disaggregated government spending components on key macroeconomic variables in Ethiopia using quarterly data over the period 1998/99:1-2010/11:4. A five variable and six variables SVAR models are constructed and the Blanchard and Perotti (2002) approach is employed to identify structural innovations. Impulse responses and variance decompositions are then estimated, respectively, to trace out the dynamic effects and unveil the relative importance of shocks in explaining the endogenous variables in the models. To substantiate the result, the recursive identification approach based on Cholesky decomposition is also used. Government expenditure shocks are expansionary and have inflationary impact at least in the short term. Tax shocks, on the other hand, have positive effect on output through increasing expenditures and have little impact on inflation. In view of the narrow tax base, there is a need to enhance the capacity to collect and administer tax. In normal times capital spending are more expansionary. Current spending can be used to stimulate the economy at the expense of lower output in the long run.enEconomic Policy AnalysisThesis