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Tax Effects on the Real Exchange Rate

  • Stacie Beck


    (Department of Economics, University of Delaware)

  • Cagay Coskuner

    (Eastern Mediterranean University)

This study examines the effects of taxes on the real exchange rate through their marginal impacts on economic activity. We develop a model that shows that an increase in the capital interest tax rate leads to real domestic currency depreciation while an increase in wage or consumption tax rates lead to a real domestic currency appreciation. These theoretical findings are supported by an empirical study using panel data estimations of ten OECD countries over 17 years.

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Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 03-11.

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Length: 33 pages
Date of creation: 2003
Date of revision:
Publication status: Published in Review of International Economics, forthcoming, 2007.
Handle: RePEc:dlw:wpaper:03-11
Contact details of provider: Postal: Purnell Hall, Newark, Delaware 19716
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  1. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad, 1999. "Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries," Journal of International Economics, Elsevier, vol. 47(2), pages 245-266, April.
  2. Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-70, Special I.
  3. Oh, Keun-Yeob, 1996. "Purchasing power parity and unit root tests using panel data," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 405-418, June.
  4. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  5. Chinn, Menzie D, 2000. "The Usual Suspects? Productivity and Demand Shocks and Asia-Pacific Real Exchange Rates," Review of International Economics, Wiley Blackwell, vol. 8(1), pages 20-43, February.
  6. Papell, David H. & Theodoridis, Hristos, 1998. "Increasing evidence of purchasing power parity over the current float," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 41-50, February.
  7. Enrique G. Mendoza & Assaf Razin & Linda L. Tesar, 1994. "Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption," NBER Working Papers 4864, National Bureau of Economic Research, Inc.
  8. Sarno, Lucio & Taylor, Mark P, 1997. "The Behaviour of Real Exchange Rates During the Post-Bretton Woods Period," CEPR Discussion Papers 1730, C.E.P.R. Discussion Papers.
  9. Ken Froot & Kenneth Rogoff, . "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
  10. Matthew Higgins & Egon Zakrajsek, 2000. "Purchasing power parity: three stakes through the heart of the unit root null," Finance and Economics Discussion Series 2000-22, Board of Governors of the Federal Reserve System (U.S.).
  11. Menzie David Chinn, 1997. "Sectoral Productivity, Government Spending and Real Exchange Rates: Empirical Evidence for OECD Countries," NBER Working Papers 6017, National Bureau of Economic Research, Inc.
  12. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  13. Asea, Patrick K & Corden, W Max, 1994. "The Balassa-Samuelson Model: An Overview," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 191-200, October.
  14. Patrick K. Asea, 1994. "The Balassa-Samuelson Model: An Overview," UCLA Economics Working Papers 710, UCLA Department of Economics.
  15. Selahattin Dibooglu, 1995. "Real Disturbances, Relative Prices, and Purchasing Power Parity," International Finance 9502002, EconWPA.
  16. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
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