Explaining macroeconomic fluctuations in Ethiopia: the role of monetary and fiscal policies

A structural VAR approach is used to examine the role of monetary and fiscal policies in explaining macroeconomic fluctuations in Ethiopia. The main results are that an increase in government spending has an expansionary effect on output, while shocks in net taxes have a contractionary effect, with relatively small and statistically significant spending and net tax multipliers; that fiscal shocks are shown to have no significant effect on the exchange rate and a statistically significant effects inflation; that contractionary monetary policy is associated with a fall in output; and that the contributions of fiscal policy shocks are larger than that of monetary policy shocks in explaining movements in output, with roughly equivalent contributions coming from shocks in fiscal policy components. Moreover, the effect of fiscal and monetary policy shocks on output improved qualitatively and quantitatively when both policy variables were jointly examined rather than estimating them separately, suggesting the importance of joint analysis.