1The paper provides a cross-country empirical analysis of the impact of corruption on foreign direct investment flows. The gravity model augmented with joint effects of corruption in the origin and destination countries determines differentiated patterns of investment flows between countries with various level of control of corruption. The estimates point towards greater investment flows between countries with good control of corruption. Moreover, if control of corruption in the destination country improves, investment flows from cleaner countries rise more than they do from countries with a higher incidence of corruption. The resulting changes in composition of investment volumes towards more investment from cleaner countries may further reinforce the strengthening of economic and political institutions that keep corruption in check. for valuable comments and suggestions.

The paper provides a crosscountry empirical analysis of the impact of corruption on foreign direct investment flows. The gravity model augmented with joint effects of corruption in the origin and destination countries determines differentiated patterns of investment flows between countries with various level of control of corruption. The estimates point towards greater investment flows between countries with good control of corruption. Moreover, if control of corruption in the destination country improves, investment flows from cleaner countries rise more than they do from countries with a higher incidence of corruption. The resulting changes in composition of investment volumes towards more investment from cleaner countries may further reinforce the strengthening of economic and political institutions that keep corruption in check.

The paper re-visits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identi…es strategic interaction among price-and wage-setting agents in the economy as an important determinant of both optimal policy and economic dynamics in deep recessions. In particular, labour market segmentation is shown to have a signi…cant in ‡uence on the length of the forward commitment to keep interest rates at zero, the magnitude of the …scal policy responses as well as in ‡ation volatility in the economy under optimal policy. JEL Classi…cation: E31, E32, E52, E61, E62.

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