Monetary Policies for Developing Countries: The Role of Corruption

Haizhou Huang and Shang-Jin Wei

No 2003/183, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the role of corruption in the design of monetary policies for developing countries in a framework of fiscal and monetary interaction and obtains several interesting results. First, pegged exchange rates, currency boards, or dollarization, while often prescribed as a solution to the problem of a lack of credibility for developing countries, is typically not credible in countries with serious corruption. Second, the optimal degree of conservatism for a Rogoff (1985)-type central banker is an inverse function of the corruption level. Third, either an optimally designed inflation target or an optimal-conservative central banker is preferable to an exchange rate peg, currency board, or dollarization.

Keywords: WP; inflation rate; corruption; fiscal policy; monetary policy; inflation targeting; currency board; dollarization; conservative central banker; commitment regime; targeted output level; dollarization regime; budget constraint; high-corruption country; discretionary regime; Inflation; Currency boards; Conventional peg (search for similar items in EconPapers)
Pages: 28
Date: 2003-09-01
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Citations: View citations in EconPapers (7)

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