Abstract:
In this paper, we develop a dynamic general equilibrium overlapping generations monetary endogenous
growth model of a financially repressed small open economy characterized by bureaucratic corruption,
and, in turn, analyze optimal policy decisions of the government following an increase in the degree of
corruption. As suggested in the empirical literature, we find that increases in the degree of corruption
should ideally result in an increase in the ratio of seigniorage to total revenue, as an optimal response of
the benevolent government. In addition, higher degrees of corruption are also found to be accompanied
by higher levels of financial repression.
