Long-Run Associations and Short-Run Dynamics Between Corruption and Inflation

Abstract

Interrelationships between corruption and economic growth and corruption and inflation have been one of the important areas of studies in recent political economics. Money received through corruption influence aggregate demand, which pushes up the inflation level and thereby increases income inequality across groups making an unsustainable social system. The existing literature shows two types of interrelationships among the variables, positive and/or negative, across countries or groups. The present study reinvestigates whether corruption and inflation maintain long-run relations and short-run dynamics in a panel of 30 countries from different strata in corruption perception index for the period 1996-2017. Using panel cointegration, VECM, and causality test, the study arrives at the conclusion that control of corruption and inflation rate have long-run equilibrium relations for the panel, and there is long-run as well as short-run causality observed from corruption to inflation. Hence, the study prescribes for implementation of stricter norms for controlling corruption to reduce social unsustainability.