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Public Debt Accumulation and Institutional Quality: Can Corruption Improve Welfare?

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  • Pierre-Henri Faure

    ()
    (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954)

Abstract

We explore the consequences of bad governance and corruption for public debt and welfare in a model of policymaking with time inconsistency. A decrease in institutional quality is supposed to adversely affect government revenue. The main point of this paper is that corruption can enhance welfare in two ways: first, by mitigating the inflationary bias of discretionary monetary policy; second, by reducing the loss due to the suboptimal distribution of distortions associated with debt accumulation. The paper thus invokes the lack of interest for explaining the prevalence of corruption in countries with low institutional quality that encounter a credibility problem in monetary management.

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Paper provided by HAL in its series Working Papers with number hal-00616572.

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Date of creation: 01 Jun 2009
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Handle: RePEc:hal:wpaper:hal-00616572

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Keywords: Corruption; fiscal and monetary policy; governance; public debt;

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  1. Alesina, Alberto & Tabellini, Guido, 1987. "Rules and Discretion with Noncoordinated Monetary and Fiscal Policies," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 619-30, October.
  2. Ciocchini, Francisco & Durbin, Erik & Ng, David T. C., 2003. "Does corruption increase emerging market bond spreads?," Journal of Economics and Business, Elsevier, vol. 55(5-6), pages 503-528.
  3. 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.
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Cited by:
  1. Ferré Carracedo, Montserrat & García Fortuny, Judit & Manzano, Carolina, 2013. "The Conservativeness of the Central Bank when Institutional Quality is Poor," Working Papers 2072/222198, Universitat Rovira i Virgili, Department of Economics.

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