The Dynamic Relationship between Corruption-Inflation : Evidence from Panel VAR

This paper aims to explain the mitigated causality nexus between corruption and inflation. For that, we apply a panel vector autoregression model on a large sample of 180 countries over the period 1996-2014. Using two corruption indexes and subsamples estimations, results provide evidence that the inflation-corruption nexus is bi-directional. The causal effect is more important from corruption to inflation. Interactions remain significant but heterogeneous across subsamples with different income-level. Corruption effect is persistent only in low-middle income economies and its adverse effect on inflation is weaker in high income economies. The two-ways relationship between inflation and corruption provides plausible explanations of the inability to control inflation and the situation of poverty trap in some countries