Bank, Borrow or Steal: Analysing the relationship between Corruption and Inflation in sub-Saharan Africa

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: The sub-Saharan African region is often considered the most corrupt in the world and has been characterised by macroeconomic instability; several countries have experienced out of control inflation in recent years. Corruption, defined as the abuse of public power for private gain discourages enterprise and investment, and encourages capital flight and rent-seeking; all of which increase the difficulty of raising tax revenue. The difficulty in collecting taxes can establish powerful motives for governments to turn to the printing presses in order to generate seigniorage, which in turn causes inflation. The aim of this thesis is to determine whether corruption and inflation are correlated in thirty six countries in sub-Saharan Africa over the period 2001-2011. This will be achieved through econometric panel regression analysis and by theoretical analysis of the mechanisms by which the relationship occurs. Our findings demonstrate that corruption has a statistically significant reinforcing effect on inflation in sub-Saharan Africa. This is ostensibly due to the negative effects of corruption on the ability of governments to fund public expenditure thus creating motives for seigniorage which can in turn cause inflation.

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