OROMIA STATE UNVERSITY

MSc Development Economics 1st Year

Advanced Macroeconmics
Group Assignment

Name
1.Sura Girma Umeta
2.Gadisa
3.Milkiyas
 Oromia State University, School of Graduate Studies, Msc In Development Economics (Burayu Center)

Articles Review
Effects of fiscal policy on economic growth in Ethiopia.
Titles: Fiscal policy and economic growth in Ethiopia and

-Does fiscal policy stimulate economic growth in Ethiopia?

Research Question They Raised.

- Are the fiscal policy variables has long run relationship with economic growth?

- How Private Investment, Productive consumption expenditure, government investment, direct

(income) tax revenue, Indirect tax revenue (nominal), Non-tax revenue and labor force affect economic
growth of Ethiopia.

Methodology they used

- Econometrics method known as the Johansen multivariate co integration model.

- Estimation technique

Hypothesis they test

-Unit Root Tests and Co-integration tests.

-Long run ARDL Bounds tests for Co-integration and short run error correction model.

The result they get

-In decision to accept or reject the null hypothesis, the p-values related to the test statistics are taken
into consideration. The model passed all the diagnostic tests against serial correlation (Durbin Watson
test and Breusch-Godfrey test), heteroscedasticity (White Heteroskedasticity Test), and normality of
errors (Jarque-Bera test). The Ramsey RESET test also shows that the model is well specified.

-The test result conforms to graphical inspection of the integration of the variables. ADF test fail to
reject the null hypothesis that variables have unit roots at their levels time series. The test result for
time series revealed that the variable is non-stationary at levels. This implies that its non-stationary is
caused by the presence of a deterministic time trend in its process, rather than by the presence of a unit
root. In this circumstance the series does not need differencing to make it stationary, just including as
additional variable in the test is enough.

Conclusion and Recommendation.

- The outcome indicates two findings: first other tax has significance and positive impact on the
economic growth in the long run. Second school enrollment has significance and positive impact on
economic growth in the long run .on other hand, in the short run: first, other tax has significant and
positive impact on the economic growth. Second direct tax has significant and positive impact on the
economic growth. So, higher budgetary allocation to capital formation is not just what is needed.
Utilization of disbursed funds meant for capital projects should be closely monitored, especially in the
area of procurement (of goods, services and works). Strong (effective and efficient) mechanism should
 Oromia State University, School of Graduate Studies, Msc In Development Economics (Burayu Center)

be put on ground to ensure that the poor who are in the majority benefit from the expenditures of the
federal government, as the state exists for the common good and none should be excluded from the
benefits it offers. This is necessary to enhance improved welfare as the welfare of the people is a
veritable ingredient for a robust economy.

- In this study investigation was conducted on the impact of fiscal policy and related variables on growth
in Ethiopia. A bound test confirmed that a long run equilibrium relationship holds among the variables.
Non-productive expenditures and non-distortionary taxes found to have neutral impact on economic
growth in long run as well as in short run. Economic growth is affected by productive expenditures
positively and significantly.

Our Comments on the: -

Importance of the study
- The role of fiscal policy becomes more important in the absence of an independent monetary policy or
exchange rate policy. The new Keynesian view that active fiscal policy plays a crucial role in boosting a
recessionary economy has proved to be accurate in economic crises. In particular, capital government
spending has more positive and long-lasting effects on the economy than current government spending.
From this, it can be suggested that a government should allocate its resources to government
investment, such as infrastructure investment or research spending, rather than to government
consumption, if it wants to increase future benefits by expansionary government spending.

Appropriateness of the methodology they used

- The ARDL model becomes the best method of data synthesis and processing that allows adaptability to
the analysis of different economic phenomena or subjects. Thus, the methodological elements
introduced by Pesaran et al. (2001) and developed and applied by Simbachawene (2018) were the
benchmark in the development of these analysis. This type of model was also used by Ali et al. (2018),
who assessed the impact of foreign direct investments on economic growth, as well as by Joshua (2019),
who, through the ARDL approach, investigated the impact of government expenditures on economic
growth.

Confirmation of the conclusion.

-The results of the impulse response functions indicate that responses of the output to fiscal policy
shocks reconciled with the standard wisdom (i.e., the Keynesian view): when government spending
rises, output increase; when government taxes increase, output falls. After disaggregating the GDP
components, the response of private consumption to fiscal policy follows the Keynesian view; however,
the response of private investment to fiscal policy reconciles with the neo-classical view. However, it
does not explain why a fiscal policy is better than other policies and its impact on inflation.

Reference
-Alesina, Alberto. 1988. “Macroeconomics and Politics.”
 Oromia State University, School of Graduate Studies, Msc In Development Economics (Burayu Center)

-Blinder, Alan S., and Solow, Robert M. 1973. “Does Fiscal Policy Matter?” Journal

of Public Economics 2

-Government Spending on the Elderly Edited by Dimitri B. Papadimitriou “President, The Levy Economics

Institute Jerome Levy Professor of Economics, Bard College, Annandale-on-Hudson, New

York”

-Jonathan Gruber-Public Finance and Public Policy.