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Optimal fiscal and monetary policy in a model with government corruption

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  • Keen, Benjamin D.
  • Strong, Christine O.

Abstract

This paper builds a theoretical model where corrupt government officials select the optimal amount of government spending directed toward building wealth for themselves and political allies. We refer to this type of government expenditures as rent extraction spending. Our results show that more government corruption leads to higher rent extraction spending, increased inflation, additional taxation, and lower non-rent extraction spending. The increases in inflation and rent extraction spending, however, are more muted when the corrupt country is a member of a currency union.

Suggested Citation

  • Keen, Benjamin D. & Strong, Christine O., 2023. "Optimal fiscal and monetary policy in a model with government corruption," Finance Research Letters, Elsevier, vol. 58(PB).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pb:s1544612323008073
    DOI: 10.1016/j.frl.2023.104435
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    References listed on IDEAS

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    1. Gründler, Klaus & Potrafke, Niklas, 2019. "Corruption and economic growth: New empirical evidence," European Journal of Political Economy, Elsevier, vol. 60(C).
    2. Xavier Debrun & Paul Masson & Catherine Pattillo, 2005. "Monetary union in West Africa: who might gain, who might lose, and why?," Canadian Journal of Economics, Canadian Economics Association, vol. 38(2), pages 454-481, May.
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    More about this item

    Keywords

    Corruption; Rent extraction; Optimal fiscal policy; Optimal monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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