Corruption and Monetary Policy in a Cash-in-Advance Economy

Mercredi | 2016-10-26
B103 12h


In this paper, we build an endogenous growth model describing a cash-in-advance economy to reassess the macroeconomic consequences of corruption in terms of monetary policy in the long run. To this end, we consider two main configurations: a model with exogenous corruption and a model with endogenous corruption. From this analysis, we can extract four main results. First, contrary to Al-Marhubi (2000) and Blackburn textit{et al.} (2011), the relation between corruption and inflation is characterized by a U-shaped relation. Second, corruption increases the growth-maximizing seigniorage rate for a lower growth rate for both exogenous and endogenous corruption. Third, unlike Paldam (2002) and Braun and Di Tella (2004), we show a negative impact of seigniorage on corruption. Finally, we demonstrate that corruption is a key determinant which positively affects the aggregate demand for money.