The Impact of Fiscal Policy on the Unemployment Rate in Egypt

Abstract

Unemployment is one of the main challenges that the Egyptian economy faces. The purpose of this paper is to examine how the unemployment rate responds to fiscal policy shocks. The study used annual time series data for the period from 1976 to 2018 collected from the world bank and the international monetary fund. Based on Blanchard and Perotti approach, the study used a five-variables structural vector autoregressive (SVAR) model with the impulse response function (IRF) tool. The main findings of this paper are that 1) At the earlier stages, a one standard deviation shock to the government spending decreases the unemployment rate until the period two, then it started to increase until reached to zero in period ten which means a positive shock to government spending has a negative impact unemployment rate. 2) At the earlier stages, a one standard deviation shock to the tax revenue temporarily decreases the unemployment rate, then it increases after the period two until it hits the zero level in the period six after that it became positive which means that in the long run, a positive shock to tax revenue has a positive impact on the unemployment rate. The study recommends the Egyptian government to run an expansionary budget to decrease the unemployment rate.