Analysis of the Relative Impact of Monetary and Fiscal Policies on Economic Growth in Ethiopia, Using Ardl Approach to Co-Integration: Which Policy Is More Potent?

Abstract

Empirical investigation on the comparative potency of monetary and fiscal policies is still dubious among two major schools of thought in economics so called classical and Keynesian. Hence, this paper investigates the relative effectiveness of monetary and fiscal policies in affecting economic growth by employing Auto-Regressive Distributive Lag Model (ARDL) for the time spanning from 1975 to 2017. The proxies used in this study for monetary and fiscal policy were Broad money supply (M2) and govern-Tekilu Tadesse, Tesfaye Melaku 88 ment consumption expenditure respectively while real GDP at constant prices in 2010 is used as proxy for economic growth in Ethiopia. Anderson and Jordan (1968) "St. Louis equation'' has been used to estimate the comparative potency of monetary and fiscal policies. The empirical results indicate that both the monetary and fiscal policies have equal statistically significant and positive impact on economic growth in Ethiopia with different significance level and magnitude. Besides of equal effectiveness, the elasticity of real output with respect to fiscal policy variable is greater than the elasticity with respect to money supply which show fiscal policy is more effective than monetary policy in influencing Real GDP in the long-run. However, in the short run, the fiscal policy is effective while that of the monetary policy proxy by money supply is ineffective in affecting output growth in Ethiopia. Therefore, to have continuous and sustainable economic growth, the coordination of monetary and fiscal policies are vital and the lack of this coordination leads to a sharp downturn of overall economic performance, even can hurt the economy.

The Impact of Monetary Policy and International Trade on Economic Growth and Inflation in ASEAN-4 Countries

“…This study fills the research gap by combining factors that affect economic growth and inflation, in previous studies only analyzing factors that affect economic growth (Akinwale & Grobler, 2019;Kallianiotis, 2019;Olamide et al, 2019a;Olamide et al, 2019b;Okoro et al, 2020;Solina & Ocampo, 2020) and inflation (Dua & Goel, 2021;Temitope, 2020;Tung, 2021) separately. In addition, this study uses panel data autoregression vector analysis, where previous research only focused on time series data analysis (Tadesse & Melaku, 2019;Tahir & Hayat, 2020;Tulasi, 2021) or panel data analysis (Younsi & Nafla, 2019;Okoro et al, 2020). This study will re-confirm whether the monetary policy stance through interest rates is the right instrument in maintaining price stability and encouraging economic growth, particularly in Indonesia, Malaysia, the Philippines, and Thailand.…”

The Efficacy of Fiscal Vs Monetary Policies in the Asia-Pacific Region: The St. Louis Equation Revisited

“…Moayedi (2013) found that in Iran’s case, monetary policy is much less effective than fiscal policy in stimulating permanent economic growth and the findings were converse to what scholars found when examining Western countries. Tadesse and Melaku (2019) analysed the impact of monetary and fiscal policies on economic growth in Ethiopia. They found an empirically significant relationship between growth and monetary and fiscal policies.…”

Impact of Foreign Aid on Economic Growth in Ethiopia

“…Several studies have been investigated the impact of foreign aid on economic growth in Ethiopia, but they came up with mixed results. For example, studies by Tadesse (2011), Duresa (2022) and Girma and Tilahun (2022) found the positive relationship between foreign aid and the long-run economic growth, while other studies (e.g., Siraj, 2012;Haile, 2015;Kidanemariam, 2013;Gebru, 2015, andAbera, 2017) found the negative relationships between foreign aid and the longrun economic growth in Ethiopia. These mixed results lead to raise question of why impact of aid on economic growth in Ethiopia continues to be paradoxical in its findings.…”