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