Abstract:
The main purpose of the study is to examine the causal relationship between government revenues and expenditures of the Jordan government over the period from 1990 to 2011 using Granger causality and VECM tests methodology. Which provides channels of causation between government revenues (GR) and government expenditures (GE).The empirical results show that bidirectional causality running between revenues and expenditure. This result supports lend support to the fiscal synchronization hypothesis, implying that government of Jordan makes its revenues and expenditures decisions simultaneously. On other hand, it shows that allocated expenditures decide the amount of revenues which in turn affects the size of expenditures for the present and the next fiscal year(s). Thus the policy maker should pay attention to the bidirectional causality between government expenditures and revenues which might complicate the government's efforts to control the budget deficit and may contribute in explaining the high national debt figure.
Machine summary:
(2012) examine the causal relationship between the government expenditure and non oil revenues in a panel of 11 selected oil exporting countries by using panel unit root tests and panel cointegration analysis.
Owoye and Onafowora (2011) examined the causal relationship between tax revenues and government expenditures in twenty-two OECD countries, eleven European Union (EU) member states, and eleven non-EU using ARDL bounds test and the Toda-Yamamoto approach to test for causality.
Chang and Chiang (2009) investigate the relationship between government revenue and government expenditure in 40 Asian countries and indicate that there is a bidirectional causal relationship between government expenditure and revenues in both the long and the short run so that fiscal synchronization hypothesis is confirmed.
Error Correction Model Once the variables in a VAR system are co- integrated, following Johansen–Juselius, we can use a vector error-correction models (VECM) in which an unconstrained VAR is used in order to assess the direction of Granger causality and to estimate the speed of adjustment to the deviation from the long-run equilibrium between government revenue (GR) and Expenditure (GE).
The ADF unit root test suggests that the estimated residuals from equation 4 and 5 are stationary: in both the cases, the null hypothesis of a unit-root can be rejected, meaning that there is evidence of a co-integration relationship between the series government revenue and expenditure.
Causality Tests The above analysis suggests that there exists a long-run relationship between government revenue and expenditure in the country.