BE J. Macroecon.

2016; 16(1): 125–144

Contributions

Mohamed Sami Ben Ali* and Seifallah Sassi

The corruption-inflation nexus: evidence
from developed and developing countries
DOI 10.1515/bejm-2014-0080
Previously published online July 10, 2015

Abstract: 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 institu-
tions in developing and emerging is a key point in explaining these disparities.

Keywords: corruption; inflation; seigniorage; developed countries; developing

countries.

JEL classification: E31; E3; C33; P44.

1 Introduction
There is an increasing number of studies in the literature asserting the negative
effects of corruption or what Transparency International describes as an “abuse
of entrusted power for private gain” on macroeconomic performance. While there

*Corresponding author: Mohamed Sami Ben Ali, College of Business and Economics,
­Department of Finance and Economics, Qatar University, Doha, Qatar,
e-mail: msbenali@qu.edu.qa
Seifallah Sassi: Laboratory of Applied Economics and Finance, University of Carthage, Tunis,
Tunisia

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126 Mohamed Sami Ben Ali and Seifallah Sassi

is an intimate connection between the two concepts, governance and corruption

are sometimes regarded as being similar. Governance is defined more broadly
than corruption in the sense that bad governance foster corruption and corrup-
tion undermines good governance (Blackburn and Forgues-Puccio, 2009).
Fighting corruption and knowing its sources and effects on the economy is an
issue that has been gaining importance in recent decades in the circles of econo-
mists. Recently, several papers on the effects of corruption have been developed.
Many dimensions have been considered in these studies providing different
potential impacts which are intimately interconnected through which corruption
may affect economic activity.
Acemoglu’s (1995) present the pioneer framework examining theoretically
the economic effects of corruption. Using an equilibrium model, Acemoglu (1995)
predict that corruption, approximated by “rent-seeking,” has a harmful effects on
skills allocation to productive activities. These effects are aggravated from gen-
eration to generation due to an persistent corruption dynamics. Corruption may
also limit human development by weakening education and public health. In this
context, Blackburn and Sarmah (2008) develop an overlapping generation model
where reproductive agents live two periods with a surviving probability for a third
period. This probability depends on the delivery of public goods and services that
could be compromised by corruption. Blackburn and Sarmah (2008) anticipate
that high levels of development are associated with low levels of corruption and
high rates of live expectancy. In the same vein, Blackburn and Powell (2011) inves-
tigate theoretically the effect of corruption on inflation from a public finance per-
spective. Using a dynamic general equilibrium model, they report that corruption
causing a loss of revenues needed for the government to finance its expenditures
forcing the government to make usage of other possibilities of revenues, particu-
larly seigniorage as the simplest alternative than increasing taxes. This will induce
an inflation raise which will act as a tax on both consumption and investment.
In the long run, corruption impede economic performance by undermin-
ing the incentive to create and innovate since differences in output per worker
across countries depend not only in differences in physical and human capital
but mainly in difference in positive incentive for individuals and firms (Hall and
Jones, 1999). Corruption hampers these positive incentives and impedes the accu-
mulation of skills and the development of new ideas causing a long run decrease
of economic activity. Pellegrini and Gerlagh (2004) study the direct and indirect
effects of corruption on economic growth for 48 countries. They highlight the fact
that corruption negatively affects economic growth rates via investment, trade,
schooling and political stability channels. At a microeconomic level, corruption
may lead to a slowdown in firm expansion to adopt efficient technologies and to
rely more on the informal sector (Svensson, 2005). Actually, the major social cost

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 The corruption-inflation nexus 127

of corruption arises from encouraging inefficient firms and enhancing misalloca-

tion of technology and capital away from their socially most productive usages
(Murphy, Shleifer, and Vishny, 1993). Thereby, when profits are “stolen” from
businesspersons through briberies and corrupted official, existing and potential
entrepreneurs may choose to shift their investments toward the informal sector to
minimize their needs for officials.
While a general consensus exists among economists that corruption causes
negative effect on economic performance, another strand of literature suggests a
positive effect of corruption on the economy. The proponents of “good corruption”
claim that briberies could allow firms to save time and to do things in an easy way
in countries plagued by bureaucracy and rigid regulations and laws (Leff, 1964;
Heidenheimer, 1970). At a macroeconomic level, the proponents of the positive
effect of corruption show that it could have positive effects on economic growth
(Aidt et al. 2008) and foreign direct investment (Egger and Winner, 2005). Eco-
nomic literature explains these positive effects of corruption by the lack of effi-
cient institutions and complicated tariff structure or regulations.
When surveying the literature, we can clearly see that the effects of corrup-
tion on economic performance have been extensively discussed and identified.
However, studies focusing on the corruption-inflation nexus are still not copious.
This is surprisingly given the importance of inflation as a main subject of interest
for modern monetary macroeconomics and the agreement on the negative impact
on the economy and on social well-being (Fischer, Sahay and Végh, 2002). The
question that may arise here is to know how inflation and corruption could be
linked. Which causal relationship could exist between the two variables that may
not be obvious at first glance?
Three main arguments are evidenced in the literature showing through
which channels corruption may impact inflation. The first argument could be
found in the theory of optimal taxation. According to this theory, governments
are generally prone to use their supremacy to print money and create inflation
as a source of governmental income. This seigniorage could be more important
in country experiencing significant tax evasion. Tax evasion and tax collection
costs are generally higher in the most corrupted countries that will therefore
know more inflation. Numerous studies pointed towards inefficiencies in fiscal
policies that explain the prevalence of this kind of issues. Blackburn and Powell
(2011) show that the more bureaucrats are corrupted, the lower the public funds
available to finance public expenditures will be, the greater will be the need to
print money and to rely on seigniorage. So, the higher is the corruption the higher
will be the monetary growth and inflation. The second argument linking inflation
to corruption states that corruption could lead to capital flight that reduces the
tax base and as a consequence a decrease in government revenues below what is

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128 Mohamed Sami Ben Ali and Seifallah Sassi

required. This decrease in revenues and increase in public spending will lead to
large public deficits or at least create a shortage in liquidities for the government
and one of the most tempting and easiest solution is to print new fiat money espe-
cially for developing countries lacking deep financial markets. The third argu-
ment in the corruption-inflation nexus states that businesses prone to corruption
may go underground and rely more on inflation tax.
Empirical literature shows a mitigated causality nexus between corruption
and inflation. In one side, some empirical literature (Getz and Volkema, 2001;
Braun and Di Tella, 2004) shows a causality from inflation to corruption. Getz and
Volkema (2001) assess the interaction between corruption and economic adver-
sity measured by the consumer price index. They show that inflation is positively
related to corruption and suggest that fighting corruption must necessarily act
directly on economic conditions in countries. The results of Getz and Volkema
(2001) suffer from endogeneity problem due to reverse causality from corruption
to inflation. Indeed, they do not conduct any robustness checks despite the use of
a cross section data with only one corruption indicator. Braun and Di Tella (2004)
address the shortcomings arise in Getz and Volkema (2001) and suggest that infla-
tion variability, not the level of inflation, induces prices uncertainty and then
lead to higher corruption. Using instrumental variables method on a sample of
75 countries over the period 1982–1994, they find that inflation variance, defined
as the standard deviation of inflation from the median, is a better predictor of
corruption than inflation level. To provide evidence that they are not capturing a
reverse causation from corruption to inflation, Braun and Di Tella (2004) check
the robustness of the association between corruption and inflation variability
using three corruption proxies with several instrumental variables: central bank
independence, the legal origin and the share of main religion.
On the other side, empirical studies including the most recent emphasize
a reversed causal relationship from corruption to inflation. Al-Marhubi (2000)
reports the existence of a robust relationship between corruption and inflation
using a cross-country data of 41 countries for the period 1980–1985. He suggested
that corruption is associated with higher inflation because it can shrink the gov-
ernment tax base thereby increasing the government temptation to use seignior-
age and print fiat money. However, Al-Marhubi’s (2000) was unable to report any
clear empirical evidence that the seigniorage channel is causing inflation. Using
a sample of 25 transition countries over the period 1994–1998, Abed and Davoodi
(2000) show that high corruption induce high inflation but this link becomes
insignificant when the structural reform index is taken into account. Similarly,
Smith-Hillman (2007) studies the potential existence of statistical evidence that
corruption weaken the effectiveness of competition policies inducing relatively
higher inflation rates. He provide evidence of a positive effect of corruption on

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 The corruption-inflation nexus 129

inflation on a sample of 43 countries but this relationship becomes statistically

insignificant when countries are subdivided into two subsamples: 23 African
countries and 20 industrial countries. Studies dealing with the effect of corrup-
tion on inflation (Abed and Davoodi, 2000; Al-Marhubi, 2000; Smith-Hillman,
2007) present some weaknesses namely that the relation is examined using a
simple OLS regression on a small sample which does not address the endogeneity
of corruption and does not take into account the inflation persistence. Moreover,
these studies omit many other explanatory variables which allow checking if cor-
ruption is affecting inflation via other channels mainly the seigniorage. Besides,
only Al-Marhubi (2000) uses various corruption indexes in order to check the
robustness of the corruption-inflation nexus.
The present paper seeks to explore further the impact of corruption on infla-
tion by exploring the seigniorage channel. This study contributes to this debate
and differs from the current literature in a number of respects. First, we shed the
light empirically on the corruption-inflation nexus by focusing on causal rela-
tionship from corruption to inflation using new and updated corruption indexes
and more control variables to deal with the omitted variables problem. Second,
most of related studies predicted the existence of this nexus but without any tan-
gible empirical evidence of the existence of a seigniorage channel. In this study,
we take a further step to analyze this channel through which corruption causes
inflation in a panel setting by considering the seigniorage channel. Third, we use
a dynamic panel regression to control for persistent inflation on a large sample
of 100 developed and developing countries. Fourth, as a robustness check, we
examine whether the corruption-inflation nexus change across regions since cor-
ruption indexes vary very little over time.
The rest of the paper is organized as follows: Section 2 presents the methodol-
ogy: the model specification, variables and data used in the study, and economet-
ric techniques. Section 3 presents the empirical results and Section 4 concludes
this study.

2 Methodology and data description

Recently, five corruption-related measures have been used in the literature. The
first set of measures was used by Mauro (1995) and consists of nine indices as
proxies for corruption and different variables extracted from Business Interna-
tional (BI) and now presented in the Economist intelligence unit. BI indices are
integers varying between 0 and 10. A high value of this index shows that the
country has “good” institutions. The second measure is the corruption indicator
published in the International Country Risk Guide. This indicator captures the

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130 Mohamed Sami Ben Ali and Seifallah Sassi

likelihood that government officials request extra unofficial payments or briber-

ies. It has been used for the first time by Knack and Keefer (1995). The main draw-
back of this indicator is that it establish the political risk caused by corruption.
The third and most widely disseminated and used measure in the literature is
the corruption perception index (CPI) published by Transparency International.
The fourth measure is the Control of Corruption Index derived by Kaufmann,
Kraay and Mastruzzi (2003) and published by the World Bank. This index uses
an aggregation strategy of most cross country indices. The fifth trade-related cor-
ruption index published by World Business Environment Survey (WBES) is used
in literature to measure corruption at the borders. This measure is constructed for
different countries where 10,000 enterprises were interviewed on different issues
and responses were averaged in a country score. This score is available for 1999
and 2002 and not for all countries and is more suitable when we deal with inter-
national trade issues (De Jong and Bogmans, 2011).
Due to data availability and taking into account the above mentioned limita-
tions, this study uses two main general country corruption indexes. The first is
the CPI. This index ranges from 0 (highly corrupted country) to 10 (very clean
country). The second is the control of corruption index (COC) and ranges from
–2.5 (high corruption) to 2.5 (absence of corruption).
As for inflation, there are a plethora of theories dealing with the concept in
the economic literature depending from which side this study considers the phe-
nomenon (cost-push inflation, demand-pull or both sides). The reached consensus
in literature regarding the definition of this concept is however universal defining
inflation as a sustained rise in the general price level. This paper uses the same
definition and considers the general increase in consumer price index over a 1-year
period as a measure of inflation. Therefore, our model will be as follows:
Infit = β0 + β 1Corruptionit + β 2 M 2it + β 3 M 2it −1 + β 4Growthit + β 5 GCit
+ β6OPEN it + β7 PSit + εit (1)

Where, Infit is the general increase in consumer price index over a 1-year period.
Corruptionit includes two country corruption indexes that we use in our study.
Determinants of inflation have been widely discussed both in theoretical
and empirical literature. This paper considers variables widely discussed in most
studies (Romer, 1993; Lane, 1997; Ben Ali and Ben Mim, 2011). Inflation is sup-
posed to be positively correlated to money supply. Monetary inflation has been
documented in numerous studies in a single and panel countries setting (Darrat,
1986; Lim and Papi, 1997; and Bonato, 2007). We include the ratio of money and
quasi money to GDP (M2it) as a measure of liquid liabilities and its lagged one
period value (M2it–1) to capture any potential independent effect of money supply.

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 The corruption-inflation nexus 131

By doing so, we control for the effect of corruption on inflation beyond its possible
effect through seigniorage. To account for the impact of economic performance
on inflation, we use the annual growth rate of real per capita GDP (Growthit).
We include in our specification the government final consumption expenditure
as percentage of GDP (GCit) to control for the government willingness to run
expansionary fiscal policies. Higher government final consumption is expected
to exert an inflationary pressure and produce inflation. Such positive relation-
ship between fiscal deficits and inflation have been reported in numerous studies
(Phelps, 1973; Sargent and Wallace, 1981; Végh, 1989; Cukierman, 1992; and Catão
and Terrones, 2005). Our model also considers trade openness as a determinant
of inflation. Economic literature highlights two main channels suggesting that
the effect of openness on inflation is negative in the sense that more openness
reduces inflation levels. The first channel supports the idea that trade openness
push domestic firm to put extra effort to control costs (Grossman and Helpman,
1991). The second channel support the idea that greater international competi-
tion foster productivity which could persistently lower inflation levels (Gruben
and McLeod, 2004; Borio and Filardo, 2007; Ben Ali and Ben Mim, 2011). In its
specification, this paper uses the ratio of exports and imports to GDP (OPENit) as
indicator of trade openness. In addition, it considers in the empirical framework
a measure of governance as captured by the political stability index (PSit).
Macroeconomics annual data has been used for a sample of 100 developed
and developing countries from five different geographical regions namely Ameri-
cas, Europe, Middle East and North Africa, Sub-Saharan Africa and Asia Pacific
(Appendix A). Data covers the period from 2000 to 2012. All macroeconomics
data are extracted from WDI-World Bank Development Indicators statistics. A
summary of sources and definition of variables is presented in Appendix B. The
descriptive statistics and the pair-wise correlation matrix are reported in Tables
C1 and C2 in appendix. The descriptive statistics show that the CPI and the COC
averages were 4.7 and 0.25 over the sample period, respectively. The corruption
perception index varied from 1 for Nigeria in 2001 to 10 for Finland in 2000. As for
the control of corruption index, the highest score is recorded for Finland in 2000
(2,5) whereas Angola records the lowest ratio in 2000 (–1,5). The statistics show
also an average inflation rate of approximately 7.5% with a high variability for
all the 100 countries of our sample. The growth rates vary from –9.8% for Libya
in 2002 to 431% for Zimbabwe in 2003. For the monetary supply M2, the annual
growth rates and trade openness display the highest variability among all inde-
pendent variables.
The correlation matrix presented in Table C2 show that most results are con-
sistent with the economic theory predictions. For example, corruption perception
index and control of corruption index are negatively correlated with inflation.

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132 Mohamed Sami Ben Ali and Seifallah Sassi

Results also show that government consumption expenditure is positively cor-

related to inflation and negatively correlated to economic growth.
To examine the effect of corruption on inflation, four steps estimation are
used in this study. Firstly, following the literature, this paper estimate the model
for the overall sample using the standard ordinary least square method (OLS) as
a benchmark for comparison. The regression of this paper is different from the
existing literature in the sense that new and updated corruption indexes were
used. Moreover, more control variables were introduced to deal with the omitted
variables problem. The regression also differs by assessing the potential effect of
bad governance on inflation.
Since OLS regression do not control the endogeneity of some variables and
would yields biased results, we apply in a second step the instrumental variables
method (IV) using the generalized two stage least squares estimator (G2SLS).
Corruption and Growth are considered as endogenous variables accounting for
possible simultaneity with inflation. While some empirical studies show that
corruption affects inflation (Abed and Davoodi, 2000; Al-Marhubi, 2000; Smith-
Hillman, 2007), some others studies (Getz and Volkema, 2001; Braun and Di
Tella, 2004) provide empirical evidence that the interaction may be in the oppo-
site direction. Furthermore, it is well known in the literature that inflation has
an impact on macro-economic performance particularly on economic growth. To
deal with the endogeneity problem and to conduct a robustness check for our
results, we use exogenous country characteristics as instruments for Corruption
and Growth. Exogenous variables used as instruments are the legal origin of
countries. The validity of instruments used is checked using the Sargan test. In
a third step, we introduce the lagged inflation rate Infit–1 to control for persistent
inflation dynamics. The second equation tested takes the following form:
Infit = β0 + β 1 Infit −1 + β 2Corruptionit + β 3 M 2it + β 4 M 2it −1 + β 5Growthit + β6GCit
+ β7 OPEN it + β8 PSit + εit (2)

The presence of lagged inflation rate in the eq. (2) puts the model inside the
context of dynamic panel models and make traditional static panel data estima-
tors not consistent. However, efficient estimators are given through the general-
ized method of moments. Thus, we use the two step system generalized method of
Moments (SGMM) and we adopt the Windmeijer (2005) small sample robust correc-
tion which makes a finite-sample adjustment for the two-step covariance matrix.
Sargan and Hansen tests are conducted to check the validity of instruments and
the over-identifying restrictions, respectively. In a fourth step, we split our sample
into five regions namely Americas, Europe, Middle East and North Africa, Sub-
Saharan Africa and Asia Pacific to check if our results vary across sub-samples.

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 The corruption-inflation nexus 133

3 Results and discussion

Estimating outcomes of eq. (1) are reported in columns (1) to (4) of Table 1. Stand-
ard OLS regressions are reported in columns (1) and (2). OLS regressions may
suffer from endogeneity biases of Corruption and Growth variables. Columns
(3) and (4) reports IV regressions. The legal origin of countries is considered as
exogenous variable and then can be used as instrument.1 A growing literature,
surveyed in La Porta, Lopez-de-Silanes, and Shleifer (2008), provides evidence
that the historical origin of a country’s laws is highly correlated with its regula-
tions and economic outcomes. Studies also show that the differences in investor
protection, explained by legal origin, determine investor confidence in markets
and consequently the economic development. La Porta, Lopez-de-Silanes, and
Shleifer (2008) concludes that “the measured differences in legal rules matter for
economic and social outcomes.” So, our first-order assumption is that the coun-
tries’ level of growth and corruption can be explained by the variation in coun-
tries’ legal origin as a historical exogenous factor. We find in our regression that
the first-stage F-statistics are more than 10, the suggested level by Staiger and
Stock (1997). Therefore, we reject the null hypothesis that the instruments are
weak. As a further test of weak instruments, the bottom of Table 1 presents the
Stock and Yogo’s test based on Cragg and Donald (1993) minimum eigenvalue
statistic. Results show that the test statistics exceed the critical value of a 5% rela-
tive bias so the null hypothesis of weak instruments is rejected. Sargan tests, com-
puted at the second stage IV regressions, provide further evidence of the validity
of used instruments.
The results of OLS regressions provide evidence of a significant and posi-
tive relationship for the corruption-inflation nexus. Our findings are in line
with Al-Marhubi’s (2000) study based on cross-country data of 41 countries
on the period 1980–1995. The study’s empirical outcomes support the posi-
tive ­corruption-inflation nexus. Estimation outcomes of IV regressions are
in accordance with the results of the literature documenting a significant
relationship between corruption and inflation using instrumental variables
method (Braun and Di Tella, 2004). Both the CPI and CCI show a significant
and negative signs of 0.007 and 0.05, respectively. That is, more corruption
causes more inflation.
Most of the studies in the literature suspect that this correlation acts through
the seigniorage channel. Cavalcanti and Villamil (2003) and Catão and Terrones
(2005) find a positive correlation between inflation and governments’ deficits.
They show that seignorage is a major source of government revenue in economies

1 See Beck and Levine (2005).

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 Table 1: Corruption-inflation nexus, overall sample.
134

Regressions OLS IV System GMM

(1) (2) (3) (4) (5) (6)

Lagged inflation rate 0.5896*** 0.6094***

(3.63) (2.91)
Corruption perception index –0.016*** –0.007*** –0.0072**
(–3.59) (–3.46) (–2.22)
Control of corruption index –0.0497*** –0.051** –0.049***
(–4.95) (–2.03) (–2.77)
Liquid liabilities M2 –0.001*** –0.001*** –0.001* –0.001 –0.001 –0.0000
(–6.46) (–6.32) (–1.85) (–1.7) (–0.82) (–1.43)
Lagged liquid liabilities M2 0.0043*** 0.0042*** 0.005*** 0.0046*** 0.006*** 0.0005**
(6.31) (6.25) (2.91) (3.26) (3.09) (1.96)
Per capita GDP growth –0.0088*** –0.0086*** –0.0003*** –0.0003** –0.0004** –0.0021***
(–5.83) (–5.88) (–2.82) (–1.99) (–2.38) (–4.92)
Mohamed Sami Ben Ali and Seifallah Sassi

Government consumption 0.0041*** 0.0042*** 0.0057** 0.0064** 0.0016*** 0.0031**

(2.74) (2.94) (2.00) (2.47) (3.06) (2.11)
Openness 0.0003** 0.0002** 0.0001 0.0001 0.0001* 0.0001*
(2.53) (2.34) (1.52) (1.74) (1.90) (1.83)
Political stability –0.0236** –0.0121* –0.01** –0.01** –0.018 –0.009
(–2.36) (–1.79) (–2.11) (–1.9) (–2.41) (–1.87)*
Constant 0.1*** 0.0273 0.13*** 0.24*** 0.402*** 0.53***
(3.15) (0.95) (2.82) (3.38) (3.54) (4.22)
R2 0.48 0.42 0.61 0. 68
F-test (p-value) 0.000 0.000

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Minimum eigenvalue statistic 18.44 16.28
Sargan test (p-value) 0.595 0.512 0.296 0.304
Wald test (p-value) 0.000 0.000 0.000 0.000
 Table 1: (continued)

Regressions OLS IV System GMM

(1) (2) (3) (4) (5) (6)

M2 test (p-value) 0.345 0.269

Hansen test (p-value) 0.540 0.618
Nb. countries 100 100 100 100 100 100
Observations 986 986 986 986 980 980

Figures in parentheses referring to Student’s T-statistics. Statistical significance at the 1%, 5%, and 10% level are shown by ***, **, and *, respec-
tively. The null hypothesis for the F-test and Wald test is that overall regression is not statistically significant. The null hypotheses for M2, Sargan and
Hansen tests are, respectively, the errors in the first-difference regression exhibit no second-order serial correlation, the used instruments and residu-
als are not correlated and the used instruments are not potentially weak.
The corruption-inflation nexus

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135
136 Mohamed Sami Ben Ali and Seifallah Sassi

with high level of corruption and weak judiciary system. The corruption reduces
the revenues that these economies can collect causing a fall in tax revenues and
at the same time an increase in seignorage. The presence of corruption in the
economy may give incentive to the government to create new fiat money through
seigniorage as a solution and a source of revenue creating by the same inflation
in the economy. An increase in corruption reduces the tax rate and raises the rate
of monetary expansion and therefore inflation. We should note that even after
the inclusion of money supply M2 and its lagged value in our model, the effect of
corruption on inflation remains obvious suggesting that corruption is affecting
inflation via some other channel.
In our estimation, all remaining independent variables exhibit the expected
signs. Government consumption is positively correlated to inflation. The fiscal
theory of inflation supports the idea that more government final consumption
induces more inflation. Numerous studies report the existence of an expected
inflation channel for the government spending which dives up consumption and
therefore inflation (Erceg and Lindé, 2014; Woodford, 2011). In fact, the forward
looking behavior of private agents pushes up both the aggregate supply and
aggregate demand. This will in turn induce higher consumption and investment
which will in turn increase inflation levels.
Openness seems not to have a major contribution in explaining the infla-
tion dynamic for the overall sample. Also, estimation outcomes report a slight
negative coefficient for per capita GDP growth on inflation. This finding is in
accordance with the Neo-Keynesian theory. In fact, when current GDP is below
its potential level, inflation is supposed to be affected negatively in the sense that
an increase in economic growth decreases inflation level (Galí and Gertler 1999;
Galí, 2007). As for the political stability index, our results show the existence of a
negative relationship between political stability and inflation. These results have
been previously reported by Aisen and Veiga (2006). The authors considered a
set of around 100 countries covering the period 1960–1999 and show that high
degree of political instability has a positive effect on inflation level. According
to the authors, political instability means new governments in these countries
generally introduced in disordered political situation. These governments are
therefore more prone to conduct undisciplined fiscal and loose monetary policies
to accomplish some short run economic objectives (Aisen and Veiga, 2006). Bad
economic policies generate higher inflation in developing countries where mon-
etary authorities more tempted by running short-run inflationary policies rather
than long-run growth enhancing policies.
Estimation results of eq. (2) by two step system GMM estimator are reported in
columns (5) and (6). The validity of used instruments in System GMM is checked
using Sargan and Hansen tests. Results confirm that instruments and residuals

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 The corruption-inflation nexus 137

are not correlated and over-identification restrictions are met. SGMMs’ estima-
tions outcomes give further support to our previous conclusions and show a posi-
tive and significant correlation between lagged inflation and present inflation as
reported in Cavalcanti and Villamil (2003). Estimation outcomes of our model
for subsamples countries using two steps SGMM are summarized in Table 2. Our
results show the existence of a persistent inflation since lagged inflation is posi-
tively correlated to current inflation for all regions. The argument here is that a
higher current inflation push the central bank to increase money supply inducing
by the same an increase in future inflation rates. Inflation persistence is however
more pronounced in developing countries such as in some poor Sub-Saharan
countries than in European countries. Contrary to developing countries lacking
any legal framework or any commitment to confine inflation in acceptable paths,
developed countries are more suspicious to keep inflation under control using
more strict fiscal and monetary policies and are more committed to low inflation
levels.
As for the corruption indexes used in this paper, the estimation outcomes
show the negative effect produced by country corruption measures for all sub-
samples but with different disparities. Sub-Saharan Africa region seems the most
affected from corruption than the Americas, Asia Pacific, Middle East and North
Africa and finally Europe. Two main reasons could explain this result. First, this
result suggest that the tax capacity in developing countries is relatively low so
government option to alleviate the deficit burden of corruption would be to print
money creating by the same more inflation in the economy. The second argu-
ment support the idea that developed countries (European countries here) are
more committed to strict and institutional governance than developing countries
lacking sound institutions and where authorities keep a large margin of manoeu-
vre to use fiscal and monetary policies when they are in a lack of resources which
may have negative effects on inflation.
Overall, our results show that in a corrupted environment with political insta-
bility and bad governance, countries display higher money supply and therefore
higher inflation rates. The process acts through the seignorage channel in the
sense that government compensates the lost in revenues by monetary expan-
sion. This effect has always been significant and negative for all specifications in
our sample countries and we have run till while considering the effect of money
supply. This suggests that corruption is affecting inflation via other channels. In
fact, when governments are faced by fiscal deficits or a shortage in liquidities the
last and unique option – if for any reasons the usage of seigniorage is restricted
– would be to borrow and to adopt a debt financing strategy. Debt financing is
therefore an alternative channel through which corruption could increase infla-
tion. In this regard, Elgin and Uras (2013) show a robust relationship between

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 138

Table 2: Corruption-inflation nexus, sub-samples estimations. Two step system GMM estimation.

Regressions Americas Asia Pacific MENA Sub-Saharan Africa Europe

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Lagged inflation rate 0.8642** 0.8853** 0.1642** 0.1853** 0.425*** 0.487*** 0.420*** 0.406*** 0.537** 0.562***
(2.47) (2.32) (2.11) (2.23) (3.09) (3.40) (3.55) (3.05) (2.21) (2.97)
Corruption perception index –0.018** –0.013** –0.01** –0.118*** –0.0116***
(–2.21) (–2.42) (–2.35) (–3.37) (–2.75)
Control of corruption index –0.003** –0.03** –0.0031*** –0.0191*** –0.0017*
(–2.44) (–2.09) (–2.52) (–3.03) (–1.79)
Liquid liabilities M2 –0.0008 –0.0001 –0.0003 –0.0023 0.0006 0.0000 0.004** 0.005 –0.0000 –0.0000
(–1.67) (–1.68) (–1.17) (–1.00) (1.26) (0.01) (1.97) (1.47) (–1.42) (–0.74)
Lagged liquid liabilities M2 0.0006** 0.0004*** 0.0027*** 0.002*** 0.0008** 0.0006** 0.014*** 0.0143*** 0.0001*** 0.0006***
(2.04) (2.84) (3.17) (3.23) (2.11) (2.49) (3.45) (2.94) (3.73) (3.34)
GDP per capita growth –0.0029* –0.0078** –0.0013 –0.0037 –0.0076*** –0.004*** –0.036*** –0.036*** –0.0008*** –0.0004*
Mohamed Sami Ben Ali and Seifallah Sassi

(–1.82) (–2.09) (–0.58) (–1.22) (–1.62) (–2.59) (–2.89) (–2.60) (–2.78) (–1.90)
Government consumption 0.0025** 0.0028 0.014** 0.001* 0.0025** 0.0016*** 0.0024 0.0083 0.0125*** 0.0111***
(2.46) (2.78) (2.09) (1.87) (2.01) (3.43) (0.46) (0.01) (3.71) (2.58)
Openness 0.0005* 0.0002** –0.0003*** –0.0002** –0.0005 –0.0000 –0.003** –0.0044*** 0.0002*** 0.0001***
(1.72) (2.14) (–2.55) (–2.25) (–0.88) (–0.04) (–2.37) (–3.18) (3.94) (4.25)
Political stability –0.03* –0.0105*** –0.009 –0.014 –0.007*** –0.0037** –0.0168*** –0.023** –0.014*** –0.01***
(–1.81) (–2.78) (–1.25) (–1.36) (–2.88) (–2.26) (–2.69) (–2.47) (–3.97) (-2.72)
Constant 0.0461*** 0.018** 0.097 0.199** 0.176** 0.047* 0.546*** 0.405** 0.204*** 0.225***
(2.68) (2.40) (1.56) (2.11) (2.34) (1.68) (5.01) (2.51) (3.58) (2.82)
Wald test (p-value) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

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M2 test (p-value) 0.133 0.209 0.407 0.295 0.271 0.272 0.446 0.344 0.354 0.424
Sargan test (p-value) 0.718 0.456 0.334 0.294 0.693 0.786 0.198 0.247 0.239 0.386
 Table 2: (continued)

Regressions Americas Asia Pacific MENA Sub-Saharan Africa Europe

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Hansen test (p-value) 0.896 0.319 0.634 0.803 0.271 0.352 0.749 0.718 0.520 0.567
Nb. countries 14 14 15 15 16 16 20 20 35 35
Observations 126 126 161 161 129 129 196 196 368 368

Figures in parentheses referring to Student’s T-statistics. Statistical significance at the 1%, 5%, and 10% level are shown by ***, **, and *, respec-
tively. The null hypotheses for Wald, M2, Sargan and Hansen tests are, respectively, overall regression is not statistically significant, the errors in the
first-difference regression exhibit no second-order serial correlation, the used instruments and residuals are not correlated and the used instruments
are not potentially weak.
The corruption-inflation nexus

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139
140 Mohamed Sami Ben Ali and Seifallah Sassi

the debt stock and control of corruption using sector data of 152 countries over a
time span of 9 years. Similarly, González-Fernández and González-Velasco (2014)
provide evidence of a direct and significant relationship between corruption and
the volume of public debt in Spanish regions during the period 1987–2010.

4 Conclusion
There is now a wave of studies on the effects of corruption on the economic activity
supporting negative effects on efficiency, investment and growth. This paper has
been to focus specifically on the effects of corruption on inflation using new and
updated corruption indexes and more control variables to deal with the omitted
variables problem. We covered the period from 2000 to 2012 and a large sample
of 100 developed and developing countries representing five different geographi-
cal regions. The empirical framework is carried out using pooled OLS regression,
generalized two stage least squares method and two steps system GMM method.
The main findings of our paper suggest that high corruption is correlated
with high inflation. This result is valid for the overall sample but with disparities
across regions. The deleterious effect of inflation is more consistent in some coun-
tries rather than others. Higher corruption in less developed countries causes a
loss of revenues for the government to finance public expenditures. Governments
will be prone in this case to rely on seignorage to financing problems as it is seen
to be the easier option than fiscal adjustment. However, seignorage is unlikely to
be the only solution to the government’s financing problems. An alternative solu-
tion and a potential channel through which corruption causes inflation would be
through debt financing.

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 The corruption-inflation nexus 141

Appendix A. Countries list

Americas Europe MENA Sub-Saharan Africa Asia Pacific

Argentina Armenia Moldova Algeria Angola Australia

Bolivia Austria Netherlands Bahrain Botswana Bangladesh
Brazil Belarus Norway Egypt Cameroon China
Canada Belgium Poland Iran Cote d’Ivoire Hong Kong
Chile Bulgaria Portugal Israel Ethiopia India
Colombia Croatia Romania Jordan Ghana Indonesia
Costa Rica Czech Russia Kuwait Kenya Japan
Ecuador Denmark Slovak Lebanon Malawi Malaysia
El Salvador Estonia Slovenia Libya Mali New Zealand
Mexico Finland Spain Morocco Mauritius Pakistan
Peru France Sweden Oman Mozambique Philippines
USA Germany Switzerland Qatar Namibia Singapore
Uruguay Greece Turkey Saudi Arabia Nigeria South Korea
Venezuela Hungary UK Tunisia Senegal Thailand
Iceland Ukraine UAE South Africa Vietnam
Ireland Yemen Sudan
Italy Tanzania
Latvia Uganda
Lithuania Zambia
Luxembourg Zimbabwe

Appendix B. Definitions and sources of variables

Variable Definition Source

INF Increasing rate of consumer price index over 1-year period WDI
CPI Corruption perception index Transparency international
COC Control of corruption index WGI
M2 Money and quasi money as % of GDP WDI
Growth Annual growth of per capita real GDP WDI
GC Government final consumption expenditure over GDP WDI
OPEN Total amount of exports and imports over GDP WDI
PS Political stability WGI
Legal Dummies origin for each country’s legal system: French La Porta et al. (1999)
origin German and Scandinavian. dataset.

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142 Mohamed Sami Ben Ali and Seifallah Sassi

Appendix C. Summary statistics and pairwise

­correlation matrix
Table C1: Summary statistics.

Variable Variable Obs Mean Std. Dev Min Max

INF Inflation rate 1244 0.075 0.220 –0.098 4.317

CPI Corruption perception index 1249 4.788 2.314 1 10
COC Control of corruption Index 1200 0.257 1.077 –1.517 2.5
M2 Money and quasi money (% GDP) 1265 78.666 75.450 10.45 669.88
Growth Annual growth of per capita real GDP 1284 2.585 4.241 –17.95 38.057
GC Government consumption expenditure 1272 16.172 5.132 2.047 42.5
(% GDP)
OPEN Total amount of exports and imports 1272 90.280 59.928 20.258 448.3
(% GDP)
PS Political stability 1200 0.007 0.979 –2.812 1.668

Table C2: Pairwise correlation matrix.

INF CPI COC M2 Growth GC OPEN PS

INF 1
CPI –0.1908 1
COC –0.2226 0.9808 1
M2 –0.1201 0.526 0.5195 1
Growth –0.1191 –0.1972 –0.1871 –0.1407 1
GC 0.0438 0.4638 0.4614 0.1369 –0.1815 1
OPEN –0.0233 0.3379 0.3282 0.4958 0.0462 –0.0146 1
PS –0.1913 0.7427 0.7675 0.3763 –0.0825 0.4188 0.3783 1

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