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Exchange Rates and Taxes

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  • John H. Makin

Abstract

This paper demonstrates that different rates of taxation on interest income and exchange gains may bias results of hypothesis testing regarding critical aspects of exchange rate behavior. Two problems are discussed specifically. First, it is shown that omission of tax considerations may bias tests of the uncovered interest parity condition toward acceptance of a "risk premium" hypothesis, conditional on exchange market efficiency. Second it is shown that a rational solution for the exchange rate conditions the relationship between an exchange rate and its determinants on two regimes: (1) tax rates on interest income and foreign exchange gains and losses at home and abroad and (2) the degree of foreign exchange market intervention and sterilization of its effects on the monetary base practiced by central banks.

Suggested Citation

  • John H. Makin, 1984. "Exchange Rates and Taxes," NBER Working Papers 1350, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1350
    Note: ME PE
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    File URL: http://www.nber.org/papers/w1350.pdf
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    References listed on IDEAS

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    1. Arturo Estrella & Jeffrey C. Fuhrer, 1983. "Average Marginal Tax Rates U.S. Household Interest and Dividend Income 1954-80," NBER Working Papers 1201, National Bureau of Economic Research, Inc.
    2. Peek, Joe & Wilcox, James A, 1983. "The Postwar Stability of the Fisher Effect," Journal of Finance, American Finance Association, vol. 38(4), pages 1111-1124, September.
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    Cited by:

    1. Roger H. Gordon, 1985. "Taxation of Investment and Savings in a World Economy: The Certainty Case," NBER Working Papers 1723, National Bureau of Economic Research, Inc.

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