Tax Revenue Implications of the Real Exchange Rate

The variety of channels through which devaluation of the exchange rate impacts on real tax receipts, calls for empirical clarification. This paper should be seen as a first attempt towards empirical evidence. It establishes the causal relationships between the real exchange rate and real tax receipts. A causality test rejects the hypothesis of unidirectional causality running from taxes to the exchange rate. The causal inferences from the Sims test allow to use the real exchange rate as an exogenous determinant in a simple simultaneous equation model. The model endogenises tax yields and tax bases to allow for a test of the significance and relevance of the exchange rate to explain variations in real tax receipts. An important insight results from the distinction of the direct (price) effect and indirect (output) effect of changes in the real exchange rate on tax receipts. A double-logarithmic version of the model with (seasonally adjusted) quarterly data is estimated for Korea and ...