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Monetary Policies for Developing Countries: The Role of Corruption

  • Haizhou Huang
  • Shang-Jin Wei

This paper examines the role of corruption in the design of monetary policies for developing countries in a framework of fiscal and monetary interaction and obtains several interesting results. First, pegged exchange rates, currency boards, or dollarization, while often prescribed as a solution to the problem of a lack of credibility for developing countries, is typically not credible in countries with serious corruption. Second, the optimal degree of conservatism for a Rogoff (1985)-type central banker is an inverse function of the corruption level. Third, either an optimally designed inflation target or an optimal-conservative central banker is preferable to an exchange rate peg, currency board, or dollarization.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/183.

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Length: 28
Date of creation: 01 Sep 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/183
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