Monetary Policies for Developing Countries: The Role of Corruption
September 1, 2003
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Summary
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.
Subject: Conventional peg, Corruption, Crime, Currency boards, Foreign exchange, Inflation, Inflation targeting, Monetary policy, Prices
Keywords: budget constraint, commitment regime, conservative central banker, Conventional peg, corruption, currency board, Currency boards, discretionary regime, dollarization, dollarization regime, fiscal policy, high-corruption country, Inflation, inflation rate, inflation targeting, monetary policy, targeted output level, WP
Pages:
28
Volume:
2003
DOI:
Issue:
183
Series:
Working Paper No. 2003/183
Stock No:
WPIEA1832003
ISBN:
9781451859331
ISSN:
1018-5941
