The Conservativeness of the Central Bank when Institutional Quality is Poor

Montserrat Ferré Carracedo, Judit Garcia Fortuny and Carolina Manzano ()

Working Papers from Universitat Rovira i Virgili, Department of Economics

Abstract: We propose an extension of Alesina and Tabellini 's model (1987) to include corruption, which is understood as the presence of weak institutions collecting revenue through formal tax channels. This paper analyses how conservative should an independent central bank be when the institutional quality is poor. When there are no political distortions, we show that the central bank has to be more conservative than the government, except with complete corruption. In this particular case, the central bank should be as conservative as the government. Further, we obtain that the relationship between the optimal relative degree of conservativeness of the central bank and the degree of corruption is affected by supply shocks. Concretely, when these shocks are not important, the central bank should be less conservative if the degree of corruption increases. However, this result may not hold when the shocks are relevant. JEL classi fication: D6, D73, E52, E58, E62, E63. Keywords: Central Bank Conservativeness; Corruption; Fiscal Policy; Monetary Policy; Seigniorage.

Keywords: Economia del benestar; Corrupció; Bancs centrals; Política monetària; Política fiscal; 336 - Finances. Banca. Moneda. Borsa (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pol
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Persistent link: https://EconPapers.repec.org/RePEc:urv:wpaper:2072/222198

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