Abstract
The purpose of this paper is to investigate the relative effect of monetary policy and fiscal policy on economic growth in Ethiopia. The paper employed annual time series data from a period of 2009 to 2019. The paper performed Augmented Dickey-Fuller test for unit root, Johansson test of co-integration and Ordinary Least Squares estimation technique to analyze the data. The findings revealed that monetary policy proxy by interest rate has significantly a negative effect on the Ethiopian economic output. Likewise, the study found that fiscal policy proxy by government expenditure has significantly and positively influenced the economic growth (GDP) in Ethiopia. Finally, the study exposed that fiscal policy is somewhat influential than monetary policy in altering economic growth of Ethiopia. The study suggested that both fiscal and monetary policies should be implemented simultaneously to ensure macroeconomic stability and sustainable economic growth in Ethiopia. It is also recommended that government annual budget and projects implementation should be monitored adequately to ensure price stability, full employment, and economic growth. Monetary policies implemented by the National Bank of Ethiopia should promote conducive investment atmosphere through appropriate stabilization of interest rates, and inflation rates to promote economic growth of the country. DOI: 10.7176/PPAR/10-11-01 Publication date: November 30 th 2020
Highlights
Ethiopia is striving to achieve fast and sustainable economic growth through an effort to stabilize its macroeconomic conditions
The results of explanatory variables indicate that monetary policy proxy by interest rate has a negative effect whereas fiscal policy proxy by government expenditure has a positive effect on the economic output of Ethiopia
The findings revealed that fiscal policy is slightly stronger than monetary policy in altering the economic growth of Ethiopia
Summary
Ethiopia is striving to achieve fast and sustainable economic growth through an effort to stabilize its macroeconomic conditions. Şen & Kaya (2015) suggested that though there are well-known formulation of monetary policy for controlling inflation and fiscal policy for dealing with public finance, both macroeconomic policies are used to stabilize the economic activities. The effectiveness of these policies in realizing the goal of expanding economic growth mainly rely on healthy working economic environment and institutional framework of the government. In Ethiopia monetary policy works under the National Bank of Ethiopia that controls the money supply and credit in the economy by setting exchange rate and interest rate, with the goal of boosting economic growth and price stability. The paper mainly relied on yearly time series data of 2009-2019 obtained from National Bank Ethiopia reports throughout the process of the study
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