The Macroeconomic Effects of Fiscal Policy Shock in Ethiopia : Evidence from a Bayesian VAR Approach
This paper investigated the macroeconomic effects of fiscal policy shocks in Ethiopiausing a Bayesian Vector Auto Regression model. We examined the dynamic responsesof output, inflation, interest rate and exchange rate to fiscal policy shocks employingquarterly data from 2000/01Q1 to 2015/16Q4. The empirical evidence suggests thatgovernment spending shock had a positive impact on output and inflation but theeffect was too small. Initially the interest rate responded negatively to governmentspending shocks and was positive with small effect and the nominal exchange rateshowed deterioration. In addition, government revenue shocks had positive effect onreal GDP and exchange rate and then they responded negatively. The inflationresponse to the net tax was medium and negative whereas its effect on interest ratewas positive, and persistent. Furthermore, positive shocks to recurrent expenditurehad a persistent positive impact on real output. Recurrent expenditure appeared notto be responsible for inflationary pressure. Interest rate picked up slightly as a resultof recurrent spending shocks in the short run. The response of exchange rate torecurrent expenditure was small and remained negative. In contrast, capital expenditure was found to have an insignificant effect on output. The reasons could bethe administrative lag and contractual bottleneck that are sometimes involved inexecuting capital projects and that appeared to be responsible for inflationarypressure. In the short term, the interest rate responded negatively and the estimatedimpact on exchange rate was insignificant. Following indirect tax revenue shocks therise in output and inflation was very persistent. Regarding the effects of indirect taxeson interest rate and exchange rate our results show a clear and negative impact- whereas direct taxes were found to affect output and inflation very little and wereinsignificant. Initially, interest and exchange rates responded positively to direct taxshock later interest rate and exchange rate become insignificant and negativerespectively. The results support the idea of a ‘crowding-in’ effect and when we takeinto account the feedback from government debt, the results suggest that the effects offiscal shocks on the majority of macro variables is too small except for the real GDPfor government revenue shock. Therefore, empirical evidence shows that it isimportant to consider government debt dynamics in the model
Year of publication: |
[2021]
|
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Authors: | Gemechu, Kumadebis |
Publisher: |
[S.l.] : SSRN |
Subject: | Äthiopien | Ethiopia | Schock | Shock | Finanzpolitik | Fiscal policy | VAR-Modell | VAR model | Wirkungsanalyse | Impact assessment |
Saved in:
freely available
Extent: | 1 Online-Ressource (36 p) |
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Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments December 25, 2020 erstellt |
Other identifiers: | 10.2139/ssrn.3755097 [DOI] |
Classification: | E44 - Financial Markets and the Macroeconomy ; E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation ; C12 - Hypothesis Testing ; C32 - Time-Series Models |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10013242241
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