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Does easy availability of cash affect corruption? Evidence from a panel of countries

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  • Singh, Sunny Kumar
  • Bhattacharya, Kaushik

Abstract

Using annual panel data of 54 countries for the period 2005-14, we examine whether currency in circulation, both aggregate and in large denominations, affects the level of corruption in a country. Standard panel data models suggest that the ratios of (i) aggregate currency in circulation to M1 and, (ii) large denomination banknotes to M1 are both statistically significant determinants of corruption. Tests for reverse causality within a panel Granger framework reveal a uni-directional causality of corruption with the first variable, but a bi-directional one with the second. These findings suggest that a limitation in the supply of high-denomination banknotes, inter alia, could be a tool to fight corruption, and bring to the fore the important role of payment systems, extending an earlier study by Goel and Mehrotra (2012). The results also highlight that, along with the government, the central bank of an economy can also play an important role in the fight against corruption.

Suggested Citation

  • Singh, Sunny Kumar & Bhattacharya, Kaushik, 2017. "Does easy availability of cash affect corruption? Evidence from a panel of countries," Economic Systems, Elsevier, vol. 41(2), pages 236-247.
  • Handle: RePEc:eee:ecosys:v:41:y:2017:i:2:p:236-247
    DOI: 10.1016/j.ecosys.2016.06.002
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    Keywords

    Control of corruption index; ICRG corruption index; Currency in circulation; Large denomination banknotes; Static panel data model; Dynamic panel data model; Panel Granger causality;

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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