The Relationship Between Budget Deficit And Economic Growth Evidence From Ethiopia

This study examined the relationship between budget deficit and economicrngrowth of Ethiopia using time series data for the period 1991 to 2019 by ap-rnplying the ARDL bounds testing approach. The empirical results indicate thatrnbudget deficit and economic growth in Ethiopia have a negative relationship inrnthe long run, and have a weak positive association in the short run. A onernpercent increment in the budget deficit causes 1.43 percent decreases in the eco-rnnomic growth of the country. This result is consistent with the neoclassical viewrnwhich says budget deficit is bad for economic growth during stimulating periods.rnMoreover, in the long run, both variables trade openness and inflation have arnpositive impact on Ethiopian economic growth, and on the other hand, the eco-rnnomic growth of Ethiopia is negatively affected by the nominal exchange raternin the long run. Apart from this, in the long run, gross capital formation andrnlending interest rates have no significant impact on the economic growth of therncountry. Therefore, the study recommends the government should manage itsrnexpenditure and mobilize the resources to generate more revenue in order torncontain the impact of budget deficit on economic growth.

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