TAX EFFECTS ON THE REAL EXCHANGE RATE

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.

JEL classification: C23, F31, F41, H30.

Keywords: Fiscal Policy, Distortionary Taxation, Real Exchange Rates.