Does fiscal policy stimulate economic growth in Ethiopia? ARDL approach

Figures & data

Figure 1. Government revenue expenditure and budget deficit (in millions of birr) and as share of GDP.

Source: Own calculation Based on MoF data

Figure 2. Productive expenditure.

Source: Data from MoF.

Table 1. Diagnostic test for fiscal policy and economic growth model

Test Statistics	LM Version	F Version
A:Serial Correlation	CHSQ(1) = 1.2426 (.265)	F(1,20) = .80799 (.379)
B:Functional Form	CHSQ(1) = 32,258 (.570)	F(1,20) = .120367 (.657)
C:Normality	CHSQ(2) = .65676 (.720)	Not applicable
D:Heteroscedasticity*	CHSQ(1) = 3.6934 (.055)	F(1,20) = 3.9144 (.057)

A:Lagrange multiplier test of residual serial correlation

B:Ramsey’s RESET test using the square of the fitted values

C:Based on a test of skewness and kurtosis of residuals

D:Based on the regression of squared residuals on squared fitted values

Table

Description of variables	Variable Definition	Source	Expected Sign
PINV -Private Investment	Obtained by deducting government investment (GINV) from gross fixed capital investment (GFCF)	NBE Database	(+)
PGC- Productive consumption expenditure	Includes lists of expenditure on health, education & economic services and	MoF Database	(+)
GINV -Government investment	Proxied by government’s capital or development expenditure and correlated with growth i.e. may affect growth directly or indirectly through its complementary role to private investment.	MoF	(+)
DT -Direct (income) tax revenue	(Distortionary revenue) and mostly negative association with growth; distorts incentives of private agents.	MoF	(-)
IDT -Indirect tax revenue (nominal)	Non-distortionary revenue and expected to impact economic growth but insignificant effect on growth (does not distort incentives).	MoF	(+)
NTR -Non-tax revenue	Includes capital revenue, fines, forfeitures, dividends etc and it has an effect on growth since it is non-distortionary way of financing government expenditure.	MoF	(+)
Labor force (LF)	It includes all people whose ages are 15 and older and actively participated in an economy. It includes both employed and unemployed.	MoF	(+)
AENR	Log of (Primary + secondary school) enrolment, proxy for human capital development. It is expected to have positive correlation with economic growth expected.	MoF	(+)

Figure 3. Test for stability of parameters for fiscal policy and economic growth.

Source: Own computation based on Microfit 4.1

Figure 4. CUSCUMSQ fiscal policy and economic growth.

Source: Own computation based on Microfit 4.1

Table 2. Bound test for fiscal policy and economic growth model

Test Statistic	Value	K
F-statistic	7.241842	7
Critical Value Bounds
Significance	I0 Bound	I1 Bound
10%	2.03	3.13
5%	2.32	3.5
2.5%	2.6	3.84
1%	2.96	4.26

Table 3. Estimated long-run coefficients using ARDL approach; ARDL (1,1,0,1,0,1,0,1,0) selected based on akaike information criterion

Dependent variable YT
Regressors	Coefficient	Standard Error	T-Ratio (Prob)
PINV	.12342	.047010	2.62537 (.0032)
NTR	−.010888	.012383	−.87921 (.391)
GINV	.019485	.0085391	2.2818 (.035)
PGC	.013672	.0037875	3.6096 (.002)
DT	−.0037464	.0032420	−.15859 (.876)
AID	−.0058027	.15080	−1.7899 (.090)
AENR	.46113	.10510	4.3873 (.000)
LF	.26810	.38777	.69139 (.498)
INTERCEPT	2.2564	3.8606	.58446 (.566)

Source: Own Computation based on Microfit 4.1

Table 4. Error correction representation for selected ARDL model; ARDL (1,1,0,1,0,1,0,1,0) selected based on akaike information criterion

Dependent variable YT
Regressor	Coefficient	Standard Error	T-Ratio (Prob)
dPINV	.34553	.12071	2.8625 (.009)
dNTR	−.0079579	.002750	−2.89377 (.001)
dGINV	.014242	.0064162	2.2196 (.037)
Dpgc	.0013957	.0029056	.48034 (.636)
dDT	−.0027383	.017375	−.15760 (.876)
dAID	−.0042413	.0031140	−1.3620 (.187)
dLF	6.2834	4.7506	1.3226 (.200]
dAENR	.50849	.19473	2.6112 (.016)
dINTERCEPT	1.6492	3.1765	.51918 (.609)
ecm(−1)	−.73091	.22633	−3.2294 (.004)

Source: Own Computation based on Microfit 4.1