The Trade-Off between Unemployment and Inflation Evidence from Causality Test for Jordan

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 integrationhave 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.