Corruption, fiscal policy, and growth: a unified approach

Abstract

We study the effects of bureaucratic corruption on fiscal policy and economic growth, where corruption (i) reduces the tax revenue raised from households, (ii) inflates the volume of government spending, and (iii) reduces the productivity of “effective” government expenditure. We distinguish between the policies pursued by (a) a non-optimizing, and (b) an optimizing government. For both cases, corruption leads to higher income tax and inflation rates and a lower level of government spending, thus hindering growth. In the circumstances, an activist government could allocate its resources in attempting to reduce the type of corruption that harms growth the most. Finally, the findings from our unified framework could rationalize the sometimes conflicting empirical evidence on the impact of corruption on growth in the literature.

An empirical analysis using new instrumental variable methods of distributional effects of corruption on public expenditures in developing countries

“…On this topic, theoretical and empirical evidence suggests that corruption affects the level and composition of public expenditure. Indeed, in the presence of corruption, the choice of public expenditure by public servants is guided by the opportunity it generates in terms of payment of rents to the detriment of the general interest (Tanzi 1998 ; Dzhumasev 2014 ; Ghosh and Kyriakos 2017 ). From the literature, we distinguish the bureaucratic model (Niskanen 1968 ) and the fiscal illusion model (Buchanan and Wagner 1977 ) which highlight the theoretical effects of corruption on the level and allocation of public expenditure.…”

“…Better, it is defended by some studies that corruption reduces growth through its effects on the allocation of public resources. Decisions of the corrupt government to allocate more resources to a given expenditure because it allows it to collect more bribes generate negative effects on economic growth (Dzhumasev 2014 ; Ghosh and Kyriakos 2017 ).…”

Central bank independence, elections and fiscal policy in Africa

“…It is these observations that provide the motivation for this paper, which seeks to explore the influence of institutional quality on public spending and finance and the implications of this for CBI effectiveness. Following Ghosh and Neanidis (2011), in exploring this study’s objective, corruption features in three distinct ways: On the expenditure side, there are two types of effects: first, corrupt officials inflate the size of the public spending, not for increasing the size of the national cake but for their own pecuniary gain; second, although the amount of public spending is higher than warranted, the productivity arising out of such spending is considerably lower than it would otherwise have been. Although some of these aspects have been captured in previous empirical papers (see Mauro, 1995, 1998; Tanzi and Davoodi, 1998; Haque and Kneller, 2008, among others), explicit analytical conditions have not been derived in the literature on the effects of corruption on public finances.…”

“…Given the pressure on seigniorage financing as a result of poor collection and usage of tax revenues, independent central banks are confronted with more fiscal policy challenges in low institutional environments, making them less effective in improving fiscal policy than in higher institutional environments. Although some empirical papers such as Mauro (1995, 1998), Tanzi and Davoodi (1998) and Haque and Kneller (2008), among others, capture some of these aspects, Ghosh and Neanidis (2011) noted that explicit analytical conditions have not been derived in the literature on the effects of corruption in public finances. We seek to examine how the level of corruption exhibited in the much wider institutional quality affects the effectiveness of independent central banks in influencing fiscal policy.…”

Growth Dynamics, Multiple Equilibria, and Local Indeterminacy in an Endogenous Growth Model of Money, Banking and Inflation Targeting

“…By modelling money in this manner, a number of recent studies have analyzed the effects of traditional monetary policies, i.e., money growth rate and cash-reserve requirements (which the financial intermediaries in the model are subjected to), and fiscal policy on growth, inflation and welfare in endogenous growth models (see for example, Espinosa-Vega and Yip 1996, 1999, 2002Gupta 2007;Bose et al 2007;Ghosh and Neanidis 2017). Against this backdrop, our paper aims to build on this line of theoretical set-up of incorporating money, by introducing, for the first time in this The remainder of the paper proceeds as follows: Section 2 outlines the economic environment.…”