A core deficiency of the aid - growth literature is that, it fails to recognize explicitly that most aidrnconventionally defined is given primarily to the government . And any effect of aid on growth andrnPoverty reduction will depend on government behavior.rnrnTo identify the effects of aid on public sector aggregates, both qualitative and empiricalrnMethodologies are used.rnrnVector autoregressive methods are applied to 39 years of annual data in Ethiopia to model the effectrnof aid on fiscal behavior. Results suggest that;rnFirst, an increase in grants and an increase in foreign loans results in an increase in recurrent budgetrnexpenditure and a decrease in capital budget expenditure. This might show the existence ofrnfungibility.rnrnSecond, an increase in grants, foreign loans and ODA results in an increase in domestic borrowing.rnWhich might require policy measure towards the decrease in the domestic borrowing.rnThird, an increase in grants results in an increase in tax revenue and on the contrary an Increase Inrnforeign loans results in a decrease in tax revenue. This unclear effect might have been caused by therndifferent nature of grants and foreign loans. As the total effect is represented by the ODA, an increasernin ODA results in an increase in the tax revenue which implies that ODA does not discouragernTaxation efforts.rnrnForth, a rise in ODA results in an increase in the tax revenue, domestic borrowing, recurrentrnExpenditure and capital expenditure, i.e. a rise in all fiscal aggregates. This could probably be therneffect part of the ODA which is not included in the budget. And this may require the need forrnDeveloping systematic guidelines as to how all ODA's should be indicated in the budget,