Fiscal policy and private investment in developing economies: Evidence from Ethiopia

Private investment is one of the major channels through which fiscal policy affects economic growth of a country. Endogenous growth theory for instance recognizes the effect of fiscal policy on economic growth through its impact on private investment although the impact varies with the type of fiscal policy instruments employed. Considering the significant role of fiscal policy on the development of private sector investment, this study has attempted to assess the effect of fiscal policy on private investment in developing economies by using evidence from Ethiopia. The study implemented a modified flexible accelerator model as a theoretical framework to explain the relationship between the study variables. The study applied the ARDL model to estimate the parameters. The study result revealed that disaggregated fiscal policy measures have a diverse effect on private investment. Specifically, government fiscal policy reforms and import duties have a significant crowding in effect while capital expenditure, recurrent expenditure and budget deficit have a crowding out effect. The study finding implies that government should have to reconsider its capital and recurrent expenditure in a way that positively contributes to the development of private investment.