Article

 

Can the exchange rate regime influence corruption? (p.107-124)

by

Popkova Katherina , University of Siegen, Department of Economics

Keywords : Exchange Rate Regime, Monetary Policy, Fiscal Policy, Corruption

JEL classification : E52, E58, E61, E63, F33

Abstract

This paper analyses the influence of the exchange rate regime of a country on the level of tolerated corruption with a special focus on the interdependency of monetary and fiscal policies. Using a simple theoretical framework based on Barro-Gordon-Model I compare independent monetary policy with a tight peg arrangement in order to find out which regime is more likely to induce governments to intensify the fight against corruption. It is shown that if corruption has a considerable positive impact on output, a tight peg regime can increase tolerated corruption. However, if corruption has a negative effect on output, a pegged exchange rate regime will lead to a lower level of tolerated corruption. The issue of particular interest appears to be the finding that a strong positive impact of corruption on output can induce governments to choose a fix peg regime while a weak positive impact of corruption (and a negative influence of corruption even more) provides an incentive to keep monetary independence.