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Optimal Policy Mix In Ethiopia

Abstract: 

Macroeconomic policies should be harmonized with objectives in which they have the most influence. This is the main idea of Mundell's principle of Effective Market Classification (EMC). This particular paper, thus, aimed at examining this fundamental principle on the Ethiopian economy. The discussion is crucial as the country is facing with the problem of achieving both internal balance (as output is quite far from the full employment level of output) and external balance (as the country is facing with significantly increasing negative non-debt financed external balance). Relaxing some of the assumptions of the Mundell's basic principle of EMC to fit to the Ethiopian economy, we find that social welfare is maximized if monetary policy is assigned to the external balance and fiscal policy to the internal balance. To maximize the impact of policy variables on their respective target variables, authorities should devise ways to make the policy instruments function effectively and properly. We further extended our analysis and seen that, despite the optimal mix, how the behavior of the two policy making authorities (the central bank and the fiscal authority) have been changing for the period from 1971 to 2008 to various developments in the internal and external balances. The result reveals that neither fiscal policy nor monetary policy had been changing in some systematic way in response to movements in the internal balance. On the other hand, both of the two polices had been responding significantly to deteriorations in the external balance. This implies that small open economies like Ethiopia are highly concerned with the external imbalance as it dictates the country's ability to borrow from abroad

Corporate Author: 
Getnet Alemun & Ethiopian Economic Association/Ethiopian Economic Policy Research Institute
Publisher: 
Ethiopian Economic Association (EEA)
ISBN/ISSN: 
978-99944-54-14-7
Primary Descriptors: 

Effective market classification

Secondary Descriptor: 

Optimal policy mix

Geographic Descriptors: 
Ethiopia
Cataloge Date: 
02/27/2013
Broad Subject heading: 
macroeconomic policies
Call Number: 
330.963 PRO 2010
Serial Key Title: 
Proceedings of the Seventh International Conference on the Ethiopian Economy
Publication catagory: 
Content type: 
Volume: 
I
Publication date: 
2013-05-27 23:10:00
Forum or Discussion date: 
2013-02-27 15:02:21
Place of publication: 
Addis Ababa, Ethiopia
Type of material: 
Book
Current frequency: 
Annualy