Exchange rate misalignment and revenue mobilisation: a global comparative evidence of trade openness thresholds

This study aims to examine the effects of exchange rate misalignment on tax revenue mobilisation on a global scale. The results from the IV-2SLS for a sample of 105 countries between the 2002–2019 periods are as follows: (i) exchange rate misalignment enhances revenue mobilisation on a global scale, a result that varies by income group, level of development, and geographical groupings. (ii) The effect of exchange rate misalignment on revenue mobilisation is rather negative in Africa, America, and Europe. (iii) REER misalignment interacts with trade openness to produce positive net effects in upper-middle-income and high-income countries. The trade openness thresholds required to nullify this positive effect are 71.395881 (%GDP) and 17.0984456 (%GDP), respectively. (iv) REER misalignment interacts with trade openness to produce positive net effects in the global sample, the developed and developing economies. The trade openness thresholds required to nullify these effects are 52.335329 (%GDP), 38.818181 (%GDP), and 63.5359116 (%GDP), respectively. The interaction rather yields negative net effects for America up to a trade openness threshold of 84.641638 (%GDP) when the effect is nullified. Practical policy implications are discussed.