Corruption, Seigniorage and Growth: Theory and Evidence

42 Pages Posted: 24 Jul 2008

See all articles by Keith Blackburn

Keith Blackburn

University of Manchester - School of Social Sciences

Kyriakos C. Neanidis

University of Manchester - School of Social Sciences

M. Emranul Haque

University of Manchester - School of Social Sciences

Date Written: July 2008

Abstract

This paper presents an analysis of the effect of bureaucratic corruption on economic growth through a public finance transmission channel. At the theoretical level, we develop a simple dynamic general equilibrium model in which financial intermediaries make portfolio decisions on behalf of agents, and bureaucrats collect tax revenues on behalf of the government. Corruption takes the form of the embezzlement of public funds, the effect of which is to increase the government's reliance on seigniorage finance. This leads to an increase in inflation which, in turn, reduces capital accumulation and growth. At the empirical level, we use data on 82 countries over a 20-year period to test the predictions of our model. Taking proper account of the government's budget constraint, we find strong evidence to support these predictions under different estimation strategies. Our results are robust to a wide range of sensitivity tests.

Keywords: corruption, seigniorage, inflation, growth

JEL Classification: E6, H6, O16, O17, O42

Suggested Citation

Blackburn, Keith and Neanidis, Kyriakos C. and Haque, M. Emranul, Corruption, Seigniorage and Growth: Theory and Evidence (July 2008). CESifo Working Paper Series No. 2354. Available at SSRN: https://ssrn.com/abstract=1173622

Keith Blackburn

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Kyriakos C. Neanidis (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom
+44-161-275-4832 (Phone)
+44-161-275-4812 (Fax)

M. Emranul Haque

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom
+0161 275 4829 (Phone)

HOME PAGE: http://www.socialsciences.manchester.ac.uk/disciplines/economics/about/staff/

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