To achieve high and sustainable economic growth, full employment and stable prices,\ncountries are using macroeconomic policies called; the fiscal and the monetary policies.\nRegarding the effectiveness of these theories, there are two different arguments; monetarists\nand Keynesian. The Keynesians argue that relative to the monetary policies, fiscal policies are\nmore effective in influencing the economy especially during the liquidity trap. However,\nmonetarists argue that money supply is the most significant driver of economic growth by\ninfluencing the households demand for goods, firms production and hence economic growth.\nHence, monetarists believe that monetary policy is more effective than fiscal policy. Having\nthe above contradicting ideas, using the Johansen cointegration approach, this study\nexamined whether the fiscal or the monetary policy is more effective on the economic growth\nof Ethiopia for the period running from 1981 to 2008. The study shows that both fiscal and\nmonetary policies have significantly increased the economic growth of Ethiopia. However,\nrelative to the monetary policies, the fiscal policies are more effective. Finally, the study\nrecommends that policy makers should focus on both policies to enhance the Ethiopian\neconomy.
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