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Uniform trade taxes, devaluation, and the real exchange rate : a theoretical analysis

Author

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  • O'Connell, Stephen A.

Abstract

Theoretically, uniform trade taxes (uniform tariff-cum-subsidies, UTCSs) are equivalent in effect to devaluations of the commercial rate in a dual exchange rate system - if one disregards smuggling and customs fraud. When either form of illegal trade is factored in, this equivalence is broken, and the real exchange rate may actually appreciate in response to an increase in the uniform trade tax rate. When illegal trade takes the form of customs fraud, the rate for exportables will depreciate, but the rate for importables will appreciate.

Suggested Citation

  • O'Connell, Stephen A., 1989. "Uniform trade taxes, devaluation, and the real exchange rate : a theoretical analysis," Policy Research Working Paper Series 185, The World Bank.
  • Handle: RePEc:wbk:wbrwps:185
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    Cited by:

    1. Devarajan, Shantayanan & de Melo, Jaime, 1990. "Membership in the CFA zone : Odyssean journey or Trojan horse?," Policy Research Working Paper Series 482, The World Bank.

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