EXCHANGE RATE VOLATILITY AND TAX REVENUE: EVIDENCE FROM GHANA
Date
2017-05-22
Authors
OFORI, ISAAC KWESI
Journal Title
Journal ISSN
Volume Title
Publisher
University of Cape Coast
Abstract
The need for the Ghanaian government to generate enough revenue for
development is becoming increasingly crucial in the era of slow economic growth,
growing unemployment and high debt. However, tax revenue performance over the
years reveals an unstable pattern. One key factor that has been overlooked in the
literature in terms of the determinants of tax revenue is exchange rate volatility.
Coming from the background of volatility in Ghana’s exchange rate, could it be the
reason for the instability in the trend of tax revenue? This question is the subject
matter of this study. To estimate the effect of exchange rate volatility on tax
revenue, the study employed the Auto Regressive Distributed Lag (ARDL)
technique after the yearly exchange rate volatilities had been generated using the
GARCH(1,1) method. The results of the study suggest that exchange rate volatility
has a deleterious effect on tax revenue both in the short-run and long-run but the
effect is more pronounced in the long-run than the short-run. The study
recommends that the Bank of Ghana step-up its exchange rate stabilization efforts
to reduce exchange rate risk imposed on international trade players.