Taxation, Corruption and the Exchange Rate Regime

Abstract

The paper analyzes the relation between institutional quality, such as corruption, in a country and its monetary regime. It is shown that a credibly fixed exchange rate to a low inflation country, like a currency board, can reduce corruption and improve the fiscal system. A monetary union, however, has ambiguous effects. I find that there is convergence between countries with regard to the level of corruption.

Keywords: exchange rate regime, monetary policy, fiscal policy, seigniorage, corruption, developing and transition countries

JEL Classification: D72, E63, F33