Relative Effectiveness of Fiscal and Monetary Policies on Economic Growth in Ethiopia

ARDL Co-integrated Approach

Abstract

Abstract

Well stabilized macroeconomic variables achieved through effective fiscal and monetary policies. This is also true in voluminous economic phenomenon. Here in fact, there are some consensuses about the effectiveness of both fiscal and monetary policies; however, yet there are also continuing debates about the relative effectiveness and stabilizing role of fiscal and monetary policies in various economic issues. To this end, it is critically important to investigate the efficiency and the effectiveness of such policies. And hence the determination of this work is to examine the relative effectiveness of fiscal and monetary policies in promoting economic growth in Ethiopia from the period 1986 to 2019. And to achieve this objective ARDL model with its important estimation techniques employed. The finding reveals the effects of both fiscal and monetary policies on economic growth are positive and significant in the short run however, in the long run, growth only affected by fiscal policy. That is in the Ethiopian context this result implies that relatively fiscal policy is more effective than monetary policy however, it doesn’t means fiscal policy is the last macroeconomic policy resort for growth; rather it implies the presence of significant room in macroeconomic policies formulation and coordination in the policy making.  Therefore, for the long run, macroeconomics policy making should focus on formulating and using effective monetary policy and exercising determination to coordinate with that of fiscal policy.

Key words: Macroeconomic policies, Growth, ARDL, co-integration.