Investigating the Asymmetric Relationship of Tax Revenue and Financial Development: NARDL Approach

Document Type : Research Paper

Authors

Faculty of Economics and Management, University of Tabriz, Tabriz, Iran.

Abstract

In oil-dependent economies like Iraq, understanding the asymmetric impacts of positive and negative shocks in the relationship between financial development and tax revenue is essential. This study examines the asymmetric causality between financial development and tax revenue in Iraq from 1993 to 2023 using the Nonlinear Autoregressive Distributed Lag (NARDL) model. This approach distinguishes the effects of positive and negative shocks, providing clear advantages over traditional linear models. The results indicate unidirectional asymmetric causality running from tax revenue to financial development. Positive shocks to tax revenue (increases in collections) are associated with a negative effect on financial development, likely due to reduced incentives for private investment and lower profitability of loans. By contrast, negative tax revenue shocks (declines in collections) exert a stronger positive and clearly asymmetric effect, presumably by releasing resources that facilitate private-sector credit expansion and overall financial deepening. Among the control variables, economic growth and government expenditure show positive and significant effects, boosting demand for financial services and supporting infrastructure development. Inflation and trade openness, however, exert negative influences: inflation erodes real returns on assets and raises transaction costs, while greater openness may subject domestic financial sectors to heightened external competition. The estimated error correction coefficient of –0.879 suggests rapid adjustment, with roughly 87.9% of short-run disequilibria corrected within one period. Overall, the findings highlight the importance of carefully calibrated tax policies to strengthen financial resilience in resource-dependent economies.

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References

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History

  • Receive Date: 25 December 2025
  • Revise Date: 11 February 2026
  • Accept Date: 13 February 2026

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