The Ethiopian economy has recorded an impressive growth performance for nearly arndecade. The government has had a substantial and persistent size in the economy overrnthese years. The dynamic effect of fiscal policy on macroeconomic variables is, however,rnfar from being obvious. The objectives of this study are, therefore, to empiricallyrncharacterize the dynamic effects of net government spending, net tax revenue as well asrndisaggregated government spending components on key macroeconomic variables inrnEthiopia using quarterly data over the period 1998/99:1-2010/11:4. A five variable andrnsix variables SVAR models are constructed and the Blanchard and Perotti (2002)rnapproach is employed to identify structural innovations. Impulse responses and variancerndecompositions are then estimated, respectively, to trace out the dynamic effects andrnunveil the relative importance of shocks in explaining the endogenous variables in thernmodels. To substantiate the result, the recursive identification approach based onrnCholesky decomposition is also used. Government expenditure shocks are expansionaryrnand have inflationary impact at least in the short term. Tax shocks, on the other hand,rnhave positive effect on output through increasing expenditures and have little impact onrninflation. In view of the narrow tax base, there is a need to enhance the capacity torncollect and administer tax. In normal times capital spending are more expansionary.rnCurrent spending can be used to stimulate the economy at the expense of lower output inrnthe long run.