Corruption, law and order, bureaucracy, and real exchange rate

Vito Tanzi and Hamid Davoodi estimate empirically the impact of corruption on public investment, government revenue, quality of infrastructure, and quality of roads.7 They find that (1) corruption is growth retarding through reducing the productivity of public investment; (2) corruption lowers the standard of infrastructure facility, thus reducing economic growth; and (3) lower government expenditure resulting from a high incidence of corruption may cause growth to decline. The purpose of this article is to investigate the impact of corruption on real exchange rate. As the above review indicates, no study has attempted to investigate the relation between an exchange rate and corruption. To this end, we provide our theoretical reasoning and models in Section II. Section III reports empirical results providing strong evidence that more corrupt countries do experience a real depreciation in their currency. Section IV presents our conclusions.