The Impact of Fiscal Policy Tools on Unemployment Rates in Jordan: Autoregressive Distributed Lag Approach

Abstract

Objectives: The main objective of this study is to investigate the impact of fiscal policy tools on unemployment rates in Jordan during the period 1986-2019.
 Methods: The study estimated two models; the first consists of tax revenues and aggregate government expenditure as independent variables, and the second consists of tax revenues in addition to capital and current government expenditures as explanatory variables.
 Results: The study variables are integrated at different levels and cointegrated in both models as indicated by Augmented Dickey-Fuller Unit Root Test and Bounds Cointegration test. Therefore, the study used the Autoregressive Distributed Lag approach for estimation. The results for the first model clarified that the increase in aggregate government expenditure causes unemployment rates to decline in the short and long run. On the other hand, the results for the second model showed that the increase in tax revenues increases unemployment rates in the short and long run. Moreover, current government spending has significant negative short and long-run effects on unemployment rates, while capital spending has only a significant negative short-run impact.
 Conclusions: Based on these outcomes, the study has introduced some recommendations with regard to increasing the effectiveness of fiscal policy instruments in reducing unemployment rates in Jordan.