|dc.description.abstract||Public sector corruption is endemic in many economies and is frequently cited as a cause of poor economic performance. Corruption hinders the completion of beneficial transactions and distorts the outcomes of economic policies. It can also affect the policy choices of governments as they attempt to counteract the consequences of corruption. Excessive inflation may be a negative side effect of corruption if the government compensates for lost revenue by increasing the rate of monetary expansion to exploit seigniorage.
There is convincing empirical evidence from cross-section studies that inflation and corruption are positively correlated. It has been suggested that this is a consequence of governments in corrupt economies turning to the use of seigniorage as a method of raising revenue (Al-Marhubi, 2000). This seems a likely route through which the correlation can arise, but the mechanism at work has not received any theoretical attention. In particular, there has been no demonstration that an optimizing government will rationally exploit seigniorage as a response to corruption. The contribution of this study is an analysis of this issue in theoretical models in which the growth rate of money supply is chosen by an optimizing government. Although an empirical analysis is undertaken to explore the relationship between corruption and inflation in chapter one, the main focus of the study is on chapters three, four, and five where theoretical analysis plays the principal role in the research.||en_GB