Abstract

This paper is an empirical investigation on the directional causality between oil price (oil imports cost), gross domestic product (GDP) and Inflation (consumer price index) for the period 1990-2011 in Jordan. Using Johannes- Juseliusco-integration test, Granger-causality test, and VECM to inspect the long-term relationship, the short-term relationship and the speed of adjustment toward long-term equilibrium between the variables. The tests' results indicate that there is a long-run equilibrium relationship between gross domestic product these results indicate that there is a long-run equilibrium relationship between gross domestic product (LGDP) and other variables oil cost (LOP) and inflation (LINF). The estimation of the adjustment speed indicates that (58%) of any previous year's deviation in gross domestic product (GDP) from its long-run equilibrium path will be corrected in the current year. Furthermore, the VECM reveals the existence of a significant, negative and weak (-0.046) causation relationship in the short run between (GDP) and oil cost (OP) running from oil cost to (GDP). Accordingly, the finding of this study suggests that an increase in oil cost today leads to a small decrease in gross domestic product. This consist with the basic hypothesis which proposes that an increase in oil price (cost) will be harm for economic growth in oil-importing countries like Jordan, but the effect size dose not consist with rate of dependency of economic activities in Jordan on oil. Thus, the study recommends investigating this inconsistent situation.