Optimal fiscal and monetary policy in a model with government corruption

Benjamin Keen and Christine O. Strong

Finance Research Letters, 2023, vol. 58, issue PB

Abstract: This paper builds a theoretical model where corrupt government officials select the optimal amount of government spending directed toward building wealth for themselves and political allies. We refer to this type of government expenditures as rent extraction spending. Our results show that more government corruption leads to higher rent extraction spending, increased inflation, additional taxation, and lower non-rent extraction spending. The increases in inflation and rent extraction spending, however, are more muted when the corrupt country is a member of a currency union.

Keywords: Corruption; Rent extraction; Optimal fiscal policy; Optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E52 E61 E62 O23 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:58:y:2023:i:pb:s1544612323008073

DOI: 10.1016/j.frl.2023.104435

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