Working Paper: NBER ID: w10093
Authors: Haizhou Huang; Shangjin Wei
Abstract: This paper examines the role of corruption in the design of monetary policies for developing countries 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 optimal 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 preferableto an exchange rate peg, currency board, or dollarization.
Keywords: Monetary Policy; Corruption; Developing Countries; Inflation Targeting; Currency Board
JEL Codes: E52; E58; E61; E62; H50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| corruption (D73) | ineffectiveness of pegged exchange rates, currency boards, or dollarization (F33) |
| corruption (D73) | degree of conservatism for a Rogoff-type central banker (E61) |
| corruption (D73) | social welfare (I38) |
| corruption levels (H57) | optimal inflation target (E31) |
| high corruption levels (H57) | further corruption (Y50) |