Abstract:

In the context of ongoing economic discussion, the connection between government actions and economic performance remains an important issue. There exist diverse opinions and arguments regarding how fiscal policy affects the unemployment rate from both empirical and theoretical perspective. The objective of this research is to explore the response of unemployment rate to fiscal policy shocks, namely government expenditure and tax revenue shocks. To achieve this goal, we gather annual data spanning from 1990 to 2021 for Türkiye employing recursive Structural VAR model. The results show that a tax revenue shock, corresponding to a one standard deviation change, initially results in a temporary decline in the unemployment but it positively affects the unemployment rate in the long run. Furthermore, the reaction of the unemployment to a government spending shock follows a hump-shape pattern. Hence, we can conclude that the government expenditure shock increases unemployment rate temporarily but decreases it slightly over the long term.

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