Abstract:

Macroeconomic policies, fiscal and monetary, are the instruments of a country to achieve high and sustainable economic growth, full employment, and stable price. There are two contradicting, arguments on the effectiveness of macroeconomic policies on the economy. Monetarists believe that monetary policy is more effective than fiscal policy. However, the Keynesian argue the reverse. Hence, this study examined the relative effectiveness of fiscal and monetary policies on the economic growth of Ethiopia for the period running from 1981-2008 using the Johansen cointegration approach. The study shows that both fiscal and monetary policies have a significant and positive effect on economic growth. However, relative to monetary policies the fiscal policies are more important. Therefore, the study recommends that policymakers should focus on both policies to enhance economic growth.