The Trade-Off between Unemployment and Inflation Evidence from Causality Test for Jordan
Hussein Ali Al-Zeaud
Abstract
This paper investigates the existence of trade-off relationship between unemployment and inflation in the
Jordanian economy between 1984 and 2011. Each of Granger-causality test is adopted to check relationship
between variables and the direction of causation. Since these techniques are sensitive to stationary, integration
and co-integration of the variables ADF and PP tests is applied to test the Stationary and integration order of the
series while Johansen-Juselius procedure is carried out to explore the existence of co-integration between
variables. The tests reveal that the variables' series have different degrees of integration, thus, their second
differenced series - which have the same degree of integration- have been used to inquire about causality between
the two phenomena. The results shown no causal relationship between unemployment and inflation in Jordan
during the study period which means there is no trade-off relationship between the two variables. This lends
support Monetarist school of thought. One of Reasons for this could be the foreign labor, which is not involved in
the unemployment rate calculation. Therefore, it may hinder the trade-off between the two variables in the short
run. The study recommends that policy makers should pay attention to these findings when they tackle
unemployment issue, and encourages them to conduct programs to reduce unemployment rate through creation of
productive and labor-intensive projects, also replace foreign labor with local labor, while continuing to control
inflation, to ensure that Jordan accomplish a desired rate of unemployment and inflation, which in turn hearten
economic growth.
Full Text: PDF