Budget Deficit and Economic Growth in Ethiopia: Evidence from ARDL-VAR Model Approach

Abstract

Budget deficit is the major problem of most developing countries. As depend on the theory economic growth and budget deficit relationship has no clear conclusion. The conducted studies shows in different developing countries the relation between budget deficit and economic growth is vary as depend on their economy. Regarding to this, the researcher is focus to see the relation between budget deficit and economic growth in Ethiopia from the period of 1974/75 to 2019/2020. Under this study the researcher used Autoregressive distributed lag and vector autoregressive model to see the long run, short run relationship and causality of budget deficit and economic growth. The study pass all tests like Augmented Dickey-Fuller, Phillips-  test statistic, diagnostic test of residual for ARDL model ,“F” and “t”  bound test. The depicted result told that there is long run positive relationship between budget deficit and economic growth, which is consistent from Keynesians School. Moreover negative relationship between external debt and budget deficit is recorded. The impact of inflation rate and tax revenue is insignificant in both long run and short run. In short run both external debt and economic growth has negative relationship which assert the Freidman and neo-classical paradigm. Depend on the study result the researcher forward some recommendation for the government.  The government should spend on productive economic activity to generate enough revenue and rise up economic growth.  Moreover, other interested researcher can improve this study by including other macroeconomic variables and looking the study with longitudinal investigation. Keywords: - ARDL model, Budget Deficit, Ethiopia, Economic Growth DOI: 10.7176/IAGS/82-01 Publication date: May 31 st 2020