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Corruption, fiscal policy, and growth: a unified approach

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  • Ghosh Sugata

    (Department of Economics and Finance, Brunel University, and Centre for Economic Development and Institutions, Middlesex, United Kingdom)

  • Neanidis Kyriakos C.

    (Department of Economics, University of Manchester, and Centre for Growth and Business Cycles Research, Manchester, United Kingdom)

Abstract

We study the effects of bureaucratic corruption on fiscal policy and economic growth, where corruption (i) reduces the tax revenue raised from households, (ii) inflates the volume of government spending, and (iii) reduces the productivity of “effective” government expenditure. We distinguish between the policies pursued by (a) a non-optimizing, and (b) an optimizing government. For both cases, corruption leads to higher income tax and inflation rates and a lower level of government spending, thus hindering growth. In the circumstances, an activist government could allocate its resources in attempting to reduce the type of corruption that harms growth the most. Finally, the findings from our unified framework could rationalize the sometimes conflicting empirical evidence on the impact of corruption on growth in the literature.

Suggested Citation

  • Ghosh Sugata & Neanidis Kyriakos C., 2017. "Corruption, fiscal policy, and growth: a unified approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 17(2), pages 1-24, June.
    • Handle: RePEc:bpj:bejmac:v:17:y:2017:i:2:p:24:n:7
    DOI: 10.1515/bejm-2016-0010
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    Cited by:

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    2. Rangan Gupta & Philton Makena, 2020. "Growth Dynamics, Multiple Equilibria, and Local Indeterminacy in an Endogenous Growth Model of Money, Banking and Inflation Targeting," Economies, MDPI, vol. 8(1), pages 1-14, March.

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    More about this item

    Keywords

    corruption; economic growth; non-optimizing and optimizing government; public expenditure and revenue;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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