The corruption-inflation nexus: evidence from developed and developing countries

This paper analyzes the relationship between corruption and inflation for a sample of 100 developing and developed countries representing five regions (Americas, Europe, Middle East and North Africa, Sub-Saharan Africa and Asia Pacific) over the period 2000-2012. Various model estimations are carried out using alternative techniques and two indicators of corruption. Our findings provide evidence of a significant and positive relationship between all country corruption measures and inflation. Countries with a corrupted environment and bad governance use seigniorage as a source of revenue which induces higher monetary expansion and therefore higher inflation rates. After controlling for money supply, our results suggest that corruption is affecting inflation via other channels. Our results show also that the negative effect of corruption on inflation is different across subsample countries. The lack of sound and committed institutions in developing and emerging is a key point in explaining these disparities.