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Optimal fiscal and monetary policy in a model with government corruption

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  • Keen, Benjamin
  • Strong, Christine

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 & Strong, Christine, 2023. "Optimal fiscal and monetary policy in a model with government corruption," MPRA Paper 117857, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:117857
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    File URL: https://mpra.ub.uni-muenchen.de/117857/1/Rent%20Extraction%20Draft0623.pdf
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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.
    3. Mehmet Ugur, 2014. "Corruption'S Direct Effects On Per-Capita Income Growth: A Meta-Analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 28(3), pages 472-490, July.
    4. Huang, Haizhou & Wei, Shang-Jin, 2006. "Monetary policies for developing countries: The role of institutional quality," Journal of International Economics, Elsevier, vol. 70(1), pages 239-252, September.
    5. Daron Acemoglu & Suresh Naidu & Pascual Restrepo & James A. Robinson, 2019. "Democracy Does Cause Growth," Journal of Political Economy, University of Chicago Press, vol. 127(1), pages 47-100.
    6. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
    7. Muscatelli, Anton, 1998. "Optimal Inflation Contracts and Inflation Targets with Uncertain Central Bank Preferences: Accountability through Independence?," Economic Journal, Royal Economic Society, vol. 108(447), pages 529-542, March.
    8. Mauro, Paolo, 1998. "Corruption and the composition of government expenditure," Journal of Public Economics, Elsevier, vol. 69(2), pages 263-279, June.
    9. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    10. Angelos Angelopoulos & Konstantinos Angelopoulos & Spyridon Lazarakis & Apostolis Philippopoulos, 2021. "The distributional consequences of rent‐seeking," Economic Inquiry, Western Economic Association International, vol. 59(4), pages 1616-1640, October.
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    Cited by:

    1. Meng, Lingxing & Hou, Yufei & Dong, Tianyu & Su, Wen, 2024. "Loose monetary policy and corporate NPD R&D innovation," International Review of Financial Analysis, Elsevier, vol. 92(C).

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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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