The causal relationship between tax revenues and expenditures in Jordan : cointegration and error-correction models

Abstract EN

The paper empirically investigates the causal relationship between government expenditures and government tax revenues in the Jordanian economy during the period 1980-2000.

The error-correction models are used, and stationarity and cointegration tests are performed to investigate whether the standard OLS regression estimates were valid.

The ADF test shows that government tax revenues and government expenditures are integrated of order one, I (1).

Engle-Granger residuals based eointegration regression test shows that real government expenditures and real government tax revenues are cointegrated.

The empirical results of the error-correction model show a bi-directional causal relationship between real government expenditures and real government tax revenues.

This result implies that there is a considerable support for the interdependence relationship betw een government expenditures and government tax revenues.

In other words, the decision to tax must take into consideration the decision to spend in the economy and vice versa.