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The Conservativeness of the Central Bank when Institutional Quality is Poor

  • Ferré Carracedo, Montserrat
  • García Fortuny, Judit
  • Manzano, Carolina

We propose an extension of Alesina and Tabellini 's model (1987) to include corruption, which is understood as the presence of weak institutions collecting revenue through formal tax channels. This paper analyses how conservative should an independent central bank be when the institutional quality is poor. When there are no political distortions, we show that the central bank has to be more conservative than the government, except with complete corruption. In this particular case, the central bank should be as conservative as the government. Further, we obtain that the relationship between the optimal relative degree of conservativeness of the central bank and the degree of corruption is affected by supply shocks. Concretely, when these shocks are not important, the central bank should be less conservative if the degree of corruption increases. However, this result may not hold when the shocks are relevant. JEL classi fication: D6, D73, E52, E58, E62, E63. Keywords: Central Bank Conservativeness; Corruption; Fiscal Policy; Monetary Policy; Seigniorage.

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File URL: http://hdl.handle.net/2072/222198
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Paper provided by Universitat Rovira i Virgili, Department of Economics in its series Working Papers with number 2072/222198.

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Date of creation: 2013
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Handle: RePEc:urv:wpaper:2072/222198
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  1. Fisman, Raymond & Wei, Shang-Jin, 2001. "Tax Rates and Tax Evasion: Evidence from 'Missing Imports' in China," CEPR Discussion Papers 3089, C.E.P.R. Discussion Papers.
  2. Berger, Helge & de Haan, Jakob & Eijffinger, Sylvester C W, 2001. " Central Bank Independence: An Update of Theory and Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(1), pages 3-40, February.
  3. Huang, Haizhou & Wei, Shang-Jin, 2005. "Monetary Policies for Developing Countries: The Role of Institutional Quality," CEPR Discussion Papers 4911, C.E.P.R. Discussion Papers.
  4. Ferré Carracedo, Montserrat & Manzano, Carolina, 2011. "Designing the Optimal Conservativeness of the Central Bank," Working Papers 2072/179623, Universitat Rovira i Virgili, Department of Economics.
  5. Schneider, Friedrich & Buehn, Andreas, 2012. "Shadow Economies in Highly Developed OECD Countries: What Are the Driving Forces?," IZA Discussion Papers 6891, Institute for the Study of Labor (IZA).
  6. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
  7. Carsten Hefeker, 2009. "Taxation, Corruption and the Exchange Rate Regime," MAGKS Papers on Economics 200911, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  8. Alberto F. Alesina & Andrea Stella, 2010. "The Politics of Monetary Policy," NBER Working Papers 15856, National Bureau of Economic Research, Inc.
  9. Javorcik, Beata S. & Wei, Shang-Jin, 2009. "Corruption and cross-border investment in emerging markets: Firm-level evidence," Journal of International Money and Finance, Elsevier, vol. 28(4), pages 605-624, June.
  10. Pierre Faure, 2011. "Public debt accumulation and institutional quality: can corruption improve welfare?," Economics Bulletin, AccessEcon, vol. 31(1), pages 17-28.
  11. Christopher Crowe & Ellen E. Meade, 2007. "The Evolution of Central Bank Governance around the World," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 69-90, Fall.
  12. Jain, Arvind K, 2001. " Corruption: A Review," Journal of Economic Surveys, Wiley Blackwell, vol. 15(1), pages 71-121, February.
  13. Pr Ahmad Jafari Samimi & Mrs Zinat Zakeri & Asst Pr Reza Moghaddasi & Mr Khosro Azizi, . "Corruption & Fiscal Decentralization: Evidence From Some Developing Countries," Global Journal of Strategies & Governance, Global Journal of Strategies & Governance, vol. 3(1), pages 75-86.
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