Tax and Price Stability in Selected African Countries: A Garch-Midas Approach

Abstract

In this paper, we provide a novel insight into the tax-inflation nexus debate using GARCH-MIDAS framework that deploys both variables in their original frequencies, thus circumventing the problems of information loss due to data aggregation and biases through data disaggregation. The study of the nexus is motivated by elevated debate around policy circles on how best to use tax as a policy tool to fill the huge development financing gap in African economies on the one hand, and achieve price stability objective on the other hand, without hurting social welfare. Using 8 selected African countries and three different tax indicators, we show that different tax measures have different implications for inflation volatility, and that the results is sensitive to country-specific characteristics and economic conditions.  We posit that the varied outcomes highlight the necessity for country-specific tax policy designs and implementation strategies, which may include to diversify and stabilize non-tax revenue streams for consistent funding of essential public goods and services and developmental initiatives across African countries.

Keywords: Inflation, GARCH-MIDAS, tax, volatility, Africa