The Dynamic Effects Of Fiscal Policy Shocks On Macroeconomic Variables In Ethiopia Evidence From (svar) Model

This paper investigates the dynamic effects of fiscal policy shocks on macroeconomic variablesrnin Ethiopia using SVAR and VECM approach on quarterly data for the period 2000/01Q1-rn2016/17Q4. From the empirical findings, the response of macroeconomic variables is asymmetricalrndepending on the aggregate and disaggregate components of fiscal policy variables.rnBasically, a positive shock to government spending was found to have a positive effect on outputrnbut at the cost of higher inflation,and has delayed positive effect on the interest rate. Inrnline with the theory, the response of output to positive innovations of tax revenue was foundrnnegative in the short run and long run. Consequently, a positive shock to tax revenue hasrna positive effect on inflation and interest rate. For the subcategory of government spendingrn–similar to total government spending a positive shock to recurrent spending has a positiverneffect on inflation and output in the short run. However, in the long run the effect of recurrentrnspending on inflation was insignificant. In addition, the response of interest rate is negativernto a positive recurrent spending shock in the short run and insignificant in the long run. Inrncontrast to recurrent spending shock, a positive shock in capital spending has a positive effectrnon output in the short run. However, it is insignificant. The reason could be the mismanagedrnand corrupted capital projects which contribute to inflationary pressure in the short run. However,rnin the long run the effect of capital spending on output is positive and significant and alsorndoes not lead inflation. Similar to recurrent spending positive innovations of capital spendingrnhas a negative effect on the interest rate in the short run. However, in the long run the effectrnof recurrent spending on interest rate was insignificant. Whereas, the effect capital spendingrnwas negative on the interest rate which result in crowding in private investment. In the caserncomponents of tax revenue, a positive shock to indirect tax has a negative effect on output inrnboth in the short run and long run. Similar to the total tax revenue shock, a positive shockrnto indirect tax has a positive effect on interest rate and inflation in the short run. However,rnthe effect of indirect in the long run on inflation was negative. On the other hand, a positivernshock to direct tax has a persistent positive effect on output and has delayed positive effect onrninterest rate and inflation in the short run. Consequently,

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