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Corruption and Seigniorage

There is convincing empirical evidence in cross-section data of a positive correlation between the level of corruption and the rate of inflation. This paper explores whether this correlation can be a consequence of a government exploiting seigniorage to compensate for revenue lost to corruption. We embed corruption within an overlapping generations economy that has money as the only store of value and in which the government optimizes the rate of monetary growth. Three different forms of corruption are modeled, and it is shown that all three can be positively correlated with increased inflation.