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Exchange rate misalignment and revenue mobilisation: a global comparative evidence of trade openness thresholds

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Abstract

This study aims to examine the effects of exchange rate misalignment on tax revenue mobilisation on a global scale. The results from the IV-2SLS for a sample of 105 countries between the 2002–2019 periods are as follows: (i) exchange rate misalignment enhances revenue mobilisation on a global scale, a result that varies by income group, level of development, and geographical groupings. (ii) The effect of exchange rate misalignment on revenue mobilisation is rather negative in Africa, America, and Europe. (iii) REER misalignment interacts with trade openness to produce positive net effects in upper-middle-income and high-income countries. The trade openness thresholds required to nullify this positive effect are 71.395881 (%GDP) and 17.0984456 (%GDP), respectively. (iv) REER misalignment interacts with trade openness to produce positive net effects in the global sample, the developed and developing economies. The trade openness thresholds required to nullify these effects are 52.335329 (%GDP), 38.818181 (%GDP), and 63.5359116 (%GDP), respectively. The interaction rather yields negative net effects for America up to a trade openness threshold of 84.641638 (%GDP) when the effect is nullified. Practical policy implications are discussed.

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Fig. 1

Source: Authors’ computation. Mis-REER is exchange rate misalignment; the continents are classified using the World Atlas

Fig. 2

Source: Authors’ computation

Fig. 3

Source: Authors’ computation. The continents are classified using the World Atlas

Fig. 4

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Notes

  1. The income groups follow the 2022 World Bank classification of income groups.

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Authors and Affiliations

  1. University of Dschang, Dschang, Cameroon

    Tii N. Nchofoung, Elvis Dze Achuo & Linda Julie Tiague Zanfack

  2. Ministry of Trade, Yaoundé, Cameroon

    Tii N. Nchofoung

  3. Ministry of Secondary Education, Yaoundé, Cameroon

    Elvis Dze Achuo

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  1. Tii N. Nchofoung
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Appendices

A1. List of countries

Albania, Algeria, Armenia, Australia, Austria, Bahrain, Bangladesh, Belgium, Benin, Bolivia, Brazil, Bulgaria, Burkina Faso, Cambodia, Cameroon, Canada, Chad, Chile, China, Colombia, Congo, Costa Rica, Côte d’Ivoire, Cyprus, Czechia, Denmark, Dominican Republic, Ecuador, Egypt, Estonia, Ethiopia, Finland, France, Gabon, Germany, Ghana, Greece, Guatemala, Haiti, Honduras, Hungary, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kenya, Kuwait, Kyrgyzstan, Latvia, Lesotho, Lithuania, Madagascar, Malaysia, Mali, Mauritius, Mexico, Moldova Republic, Mongolia, Morocco, Namibia, Nepal, Netherlands, New Zealand, Niger, Nigeria, Norway, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Portugal, Romania, Russian Federation, Rwanda, Saudi Arabia, Senegal, Serbia, Sierra Leone, Singapore, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tanzania, Thailand, Togo, Trinidad and Tobago, Tunisia, Turkey, Uganda, Ukraine, United Arab Emirates, United Kingdom, Uruguay, USA, and Vietnam

A2. Further graphs

figure a

The continents are classified using the World Atlas

figure b

The continents are classified using the World Atlas

A3. Test of cross-sectional dependence of Pesaran (2015)

Variable

CD-P value

Taxes including social contributions

0.000

Direct taxes with social contributions

0.008

Direct taxes (No social contributions)

0.000

Taxes on trade

0.000

Total taxes

0.001

REER misalignment

0.000

Internet penetration rate

0.000

GDP per capita

0.000

Financial development

0.000

Resources rents

0.000

Foreign direct investments

0.000

Trade openness

0.000

A4. Slope homogeneity test of Pesaran and Yamagata (2008)

Model

P value of test statistics

Effect of exchange rate misalignment on tax revenue

0.000

Taxes on trade

0.000

Direct taxes

0.000

Direct taxes with social contributions

0.000

Taxes including social contributions

0.000

A5. Sources and definition of variables

Variable

Source

Definition

Taxes including social contributions

UN-WIDER

Tax revenue mobilisation excluding social contribution (%GDP)

Direct taxes with social contributions

UN-WIDER

Direct taxes, including all social contributions(%GDP)

Direct taxes (no social contributions)

UN-WIDER

Direct taxes excluding social contributions(%GDP)

Taxes on trade

UN-WIDER

Taxes on international trade (%GDP)

Total taxes

UN-WIDER

Total taxes including social contributions (%GDP)

REER misalignment

CEPII

The deviation of the real effective exchange rate from its equilibrium

Internet penetration rate

World Bank

Number of people using the internet in every 1000

GDP per capita

World Bank

The natural logarithm of the Per capita growth domestic product

Financial development

World Bank

Domestic credit provided to the private sector (%GDP)

Resources rents

World Bank

Total natural resource rents (%GDP)

Foreign direct investments

World Bank

Foreign Direct Investment inflows (%GDP)

Trade openness

World Bank

Trade share (sum of exports and imports) as a percentage of GDP

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Nchofoung, T.N., Achuo, E.D. & Zanfack, L.J.T. Exchange rate misalignment and revenue mobilisation: a global comparative evidence of trade openness thresholds. Ind. Econ. Rev. 58, 281–310 (2023). https://doi.org/10.1007/s41775-023-00201-z

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