Advanced Search
MyIDEAS: Login to save this paper or follow this series

Fiscal Dynamics in Ethiopia: The Cointegrated VAR Model with Quarterly Data

Contents:

Author Info

  • Pedro M. G. Martins

    ()
    (Institute of Development Studies (IDS), University of Sussex)

Registered author(s):

    Abstract

    This paper uses the cointegrated vector autoregressive (CVAR) model to assess the dynamic relationship between foreign aid inflows, public expenditure, revenue and domestic borrowing in Ethiopia. It departs from the existing literature by using a unique quarterly fiscal dataset (1993-2008) and providing new insights into the formulation of testable fiscal hypotheses. The paper also derives and interprets structural shocks and places a strong focus on model specification. The results suggest the presence of three long-run relationships: the government budget constraint, a donor disbursement rule, and a financing trade-off. Foreign aid grants adjust to the level of development spending, which can be seen as an indication of (procyclical) aid conditionality. Moreover, domestic borrowing often compensates for lower levels of revenue and grants, highlighting the cost of aid unpredictability and revenue volatility. The policy implication is that if foreign aid flows are to be made more effective, they should be provided in a predictable and countercyclical fashion in order to smooth exogenous shocks.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sussex.ac.uk/economics/documents/wps9-2010-martins/pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Department of Economics, University of Sussex in its series Working Paper Series with number 0910.

    as in new window
    Length:
    Date of creation: Oct 2010
    Date of revision:
    Handle: RePEc:sus:susewp:0910

    Contact details of provider:
    Postal: Jubilee Building G08, Falmer, Brighton, BN1 9SL
    Phone: +44 (0) 1273 678889
    Fax: +44 (0)1273 873715
    Email:
    Web page: http://www.sussex.ac.uk/economics
    More information through EDIRC

    Related research

    Keywords: Fiscal Response; Foreign Aid; Time Series Models; Africa;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Jurgen A Doornik & Henrik Hansen, . "An omnibus test for univariate and multivariate normalit," Economics Papers W4&91., Economics Group, Nuffield College, University of Oxford.
    2. Johansen, Soren, 2000. "Modelling of cointegration in the vector autoregressive model," Economic Modelling, Elsevier, vol. 17(3), pages 359-373, August.
    3. Hylleberg, S. & Engle, R. F. & Granger, C. W. J. & Yoo, B. S., 1990. "Seasonal integration and cointegration," Journal of Econometrics, Elsevier, Elsevier, vol. 44(1-2), pages 215-238.
    4. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
    5. Svend Hylleberg, 2006. "Seasonal Adjustment," Economics Working Papers, School of Economics and Management, University of Aarhus 2006-04, School of Economics and Management, University of Aarhus.
    6. Uwe Hassler & Matei Demetrescu, 2005. "Spurious Persistence and Unit Roots due to Seasonal Differencing: The Case of Inflation Rates," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 225(4), pages 413-426, July.
    7. Susana Franco-Rodriguez, & Mark McGillivray, & Oliver Morrissey, . "Aid and the Public Sector in Pakistan: Evidence with Endogenous Aid," Discussion Papers 98/2, University of Nottingham, CREDIT.
    8. Johansen, S., 1999. "A Small Sample Correction for Tests of Hypotheses on the Cointegrating Vectors," Economics Working Papers, European University Institute eco99/9, European University Institute.
    9. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
    10. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, December.
    11. Franco-Rodriguez, Susana & Morrissey, Oliver & McGillivray, Mark, 1998. "Aid and the Public Sector in Pakistan: Evidence with Endogenous Aid," World Development, Elsevier, vol. 26(7), pages 1241-1250, July.
    12. George Mavrotas & Bazoumana Ouattara, 2006. "Aid Disaggregation and the Public Sector in Aid-Recipient Economies: Some Evidence from Cote D'Ivoire," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 10(3), pages 434-451, 08.
    13. Osei, Robert & Morrissey, Oliver & Lloyd, Tim, 2005. "The Fiscal Effects of Aid in Ghana," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) RP2005/61, World Institute for Development Economic Research (UNU-WIDER).
    14. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    15. Ndulu,Benno J. & O'Connell,Stephen A. & Bates,Robert H. & Collier,Paul & Soludo,Chukwuma C., 2009. "The Political Economy of Economic Growth in Africa, 1960–2000," Cambridge Books, Cambridge University Press, number 9780521127752, 9.
    16. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, Elsevier, vol. 53(1-3), pages 211-244.
    17. Mumtaz Hussain & Andrew Berg & Shekhar Aiyar, 2009. "The Macroeconomic Management of Increased Aid: Policy Lessons from Recent Experience," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 13(s1), pages 491-509, 08.
    18. Mark McGillivray & Oliver Morrissey, 2000. "Aid fungibility in Assessing Aid: red herring or true concern?," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 413-428.
    19. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 97(387), pages 616-41, September.
    20. Philip Hans Franses & Bart Hobijn, 1997. "Critical values for unit root tests in seasonal time series," Journal of Applied Statistics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 24(1), pages 25-48.
    21. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
    22. Heller, Peter S, 1975. "A Model of Public Fiscal Behavior in Developing Countries: Aid, Investment, and Taxation," American Economic Review, American Economic Association, American Economic Association, vol. 65(3), pages 429-45, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:sus:susewp:0910. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Russell Eke).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.