Does Fiscal Policy Influence Economic Growth in Ethiopia? A Review Article

Abstract

The aim of this literature review-based work is to assess the current arguments regarding
the existing consequences of fiscal policy variables on the growth of the economy. The
review applied a document review methodology to investigate recent fiscal policy
empirical works together with fiscal policy trends in Ethiopia. The reviewed literature has
shown that the influence of fiscal policy on countries' growth is not clear-cut. It can be
either positive or negative, and some studies even show no discernible effect. Even though
the weight of fiscal policy on the growth of the economy is questionable, the findings of the
reviewed studies supported that fiscal policy had a positive impact on the growth of the
country's economy. The implications for policy of these findings are that fiscal policy is
more likely to positively affect the growth of the real sector, especially for developing
countries like Ethiopia. This clarifies the confusion among governments and decisionmakers regarding the mixed effects of fiscal policy on economic growth. Therefore,
policymakers should give due attention while designing a fiscal policy or an economic
policy in general, and choosing appropriate fiscal policy tools. Although this review
included pertinent scholarly works on the relationship between fiscal policy variables and
the growth of the economy of nations, future research would benefit from investigating
threshold effects, systematically estimating optimal debt-to-GDP thresholds for Ethiopia
and comparable economies, and identifying which institutional dimensions—control of
corruption, regulatory quality, or rule of law—most strongly mediate fiscal policy
outcomes.