Exploring the co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach

Wavelet Coherence Analysis is powerful to study co-movements between two stationary time series.

1. Exploring the Co-movements of Tax-to-GDP in
Rwanda: A Wavelet Analysis Approach
Clement Uwizeye
RRA & EPRN
10th EPRN Annual Economic Research Conference, 27-28th June 2024
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
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2. Outlines
Motivation
Purposes
Survey from Literature Review
Empirical model
Data Description
Results
Robustness & Sensitivity Analysis
Discussion on Results
Conclusions
Policy recommendations
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
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3. Motivation
Tax-to-GDP ratio is a key indicator of a country’s fiscal health.
Understanding co-movements between tax to GDP can inform
economic policies.
Does high government spending leads high tax to GDP?
Does industry and service as potential indicators to GDP lead higher
tax to GDP?
How resilient in tax policies from high currency depreciation and
inflation?
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
3 / 19

4. Purposes
To investigate the co-movements between tax to GDP in Rwanda.
To utilize wavelet analysis to uncover patterns and relationships over
time.
To provide policy recommendations based on the results.
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
4 / 19

5. Survey from Literature Review-trends
Dahal (2020), As GDP increases, economic activity expands, leading
to higher income levels and consumption, which in turn broadens the
tax base and enhances tax revenues.
Nguyen and Darsono (2022), higher government spending may
necessitate increased tax rates or more effective tax collection
mechanisms
QadirPatoli et al. (2012), High inflation erodes the real value of
tax revenues and reduces the purchasing power of consumers,
potentially shrinking the tax base
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
5 / 19

6. Survey from Literature Review-Wavelet coherence
Rua (2010)employed wavelet analysis to examine the co-movements
between GDP and unemployment rates, revealing significant
time-varying patterns that traditional econometric methods might
overlook.
Aguiar-Conraria and Soares (2011)used wavelet coherence to
study the synchronization of economic cycles between countries,
demonstrating the utility of wavelet analysis in capturing complex
economic dynamics
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
6 / 19

7. Empirical model
Descriptive analysis using Trend
Wavelet Coherence Analysis: This method is effective for
understanding how the correlation between the two variables evolves
over time and across different frequencies
Time-Frequency Domain Exploration: This allows for the
detection of both the period and duration of significant relationships
between the series, making it exceptionally useful for economic data
that exhibits cyclical (co-movement) patterns.
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
7 / 19

8. Empirical model
Mathematical Foundation: The mathematical basis of wavelet
coherence includes transforming the time series data using wavelets,
which are mathematical functions that can localize data in time and
scale (frequency)
This process helps in identifying the periods during which the tax
streams and GDP are most aligned.
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
8 / 19

9. Data Description
Table:
Variables Data Span Source
Nominal GDP 2008-2023 Monthly NISR
Real GDP 2008-2023 Monthly NISR
Inflation Rate 2008-2023 Monthly MINECOFIN
Interest Rate 2008-2023 Monthly NBR
Industry Value Added 2008-2023 Monthly NISR
Service Value Added 2008-2023 Monthly NISR
Revenue (Use for Tax to GDP) 2008-2023 Monthly MINECOFIN
Depreciation 2008-2023 Monthly NISR
(1) The Quarterly & Annual data converted into monthly for Wavelet analysis.
(2) In trend analysis, the aggregated data from 2009 to 2023 annual used.
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
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10. Results-Trend analysis
Figure:
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
10 / 19

11. Results-Wavelet Coherence
Figure:Figure:Figure:Figure:
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
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12. Results-Wavelet Coherence
Figure:Figure:Figure:Figure:
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
12 / 19

13. Robustness & Sensitivity Analysis
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
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14. Robustness & Sensitivity Analysis
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
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15. Discussion on Results
From 2021, Increase of industry value added, Government spendimg
are accompanied by decline in taxGDP
There is high currency depreciation which lead to economic instability
accompanied by decline in taxGDP
Using Wavelet coherence:
There is strong correlations between tax policies and nominal
economic growth during 2008-2010 & 2016-2020
There is strong correlations during 2008-2010 and 2019-2022,
indicating significant alignment between tax policies and inflation
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
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16. Discussion on Results
There is strong correlations in short to medium-term alignments
between tax policies and industry performance.
Overall, the strong correlations observed in short term at some points
in period, showing inefficiency tax policy for sustainable economy
The paper contribute to the literature by Enhancing focus on
counter-cyclical fiscal policies.
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
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17. Conclusions
The high coherence with interest rates, inflation, and other variables
highlight times of strong policy alignment
The low coherence suggest areas where tax policies and economic
performance were less coordinated
This comprehensive analysis provides a foundation for refining and
enhancing tax policies to support sustainable economic growth
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
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18. Policy recommendations
Understand the successful elements and replicate them in current and
future policies.
Focus on refining and sustaining these strategies to ensure continued
economic stability and growth
Explore alternative strategies and enhance coordination between tax
policies and economic variables to strengthen these relationships
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
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19. Comments & Suggestions
Any contribution to the paper?
ORCiD: https://orcid.org/0000-0003-1459-3196
Google Scholar: https://bit.ly/ClementResearcherRRA
Thank you for your attention.
Murakoze!
Clement Uwizeye (RRA & EPRN) Exploring the Co-movements of Tax-to-GDP in Rwanda: A Wavelet Analysis Approach
10th EPRN Annual Economic Research Conference, 27-28th June 2024
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