سیاست های پولی برای کشورهای در حال توسعه: نقش کیفیت سازمانی

Weak public institutions, including high levels of corruption, characterize many developing countries. We demonstrate that this feature has important implications for the design of monetary policymaking institutions. We find that a pegged exchange rate or dollarization, while sometimes prescribed as a solution to the credibility problem, is typically not appropriate for countries with poor institutions. Such an arrangement is inferior to a Rogoff-style conservative central banker, whose optimal degree of conservatism is proportional to the quality of institutions. Finally, we cast doubt on the notion that a low inflationary framework can induce governments to improve public institutions.

Textbook discussions of monetary policies do not usually separate developing from developed countries. Are there important features about developing countries that might suggest that the optimal design of monetary policies should be different? In this paper, we study one particular feature that is prevalent in developing (and transition) economies, namely weak public governance. Obviously, developed countries are not immune to this problem, but it is far less prevalent than in many developing countries. Surprisingly, the consequence of this feature on the design of monetary policy has not been systematically examined. This paper aims to fill this void, and to demonstrate that the effect is not trivial. As many developing countries lack credibility in their monetary policy, a subject heavily studied in the literature, a conventional wisdom is that these countries should peg their currency to a major currency from a low-inflationary country, adopt a currency board, or dollarize. Our analysis in this paper, however, will show that when weak institutions are considered these policies are not necessarily appropriate. Our theory combines useful ingredients from two different strands of the literature. The first strand is on the design of monetary policy, which is too voluminous to be referenced completely here, but includes, as seminal and other important contributions, Kydland and Prescott (1977), Calvo (1978), Barro and Gordon (1983), Rogoff (1985), Barro (1986), Alesina and Tabellini (1987), Cukierman (1992), Svensson (1997), Walsh (1995), and Benigno and Woodford (2003).1 In this paper, we make use of a framework developed by Alesina and Tabellini (1987), where the government's objective function includes provision of public goods in addition to minimizing inflation and output fluctuations. The second strand studies the causes and consequences of weak institutions, in particular, corruption. This literature includes work on the effects of institutions on development (Rose-Ackerman, 1975, Shleifer and Vishny, 1993 and Mauro, 1995). Wei, 2000 and Wei, 2001, Bai and Wei (2000), Fisman and Wei (2004) and Du and Wei (2004) investigated the consequences of corruption for international capital flows, tax evasion, and stock market volatility. As far as we know, these two strands of the literature have not been married before. In other words, none of the papers in the literature that we know of has examined the implications of weak institutions, including widespread corruption, for the design of monetary policies. For the purpose of our paper, we model weak institutions as an erosion of a government's ability to collect revenue through formal tax channels. This may arise through outright theft by tax officials or practices whereby tax inspectors collude with taxpayers to reduce the latter's tax obligation in exchange for a bribe. Under an inflation targeting framework, we study how the socially optimal level of the inflation target is affected by weak institutions. We further examine the implications for the design of several other monetary frameworks, including a currency board, dollarization, and a Rogoff-type conservative central banker, and rank them in terms of social welfare. We also examine the authorities' incentive in strengthening institutions from a political economy perspective. Several interesting results emerge from the analysis. First, the optimal inflation target is higher for a country with poorer institutional quality. Hence, an inflation target of 1–4%, that is common among advanced industrialized countries and might be called “international best practice,” is generally not something to be emulated by developing countries. Second, pegged exchange rate, currency boards, or dollarization are often prescribed as ways to solve the lack of credibility problem. However, these monetary regimes are typically not very credible themselves and are likely to fail (often associated with a currency crisis) in countries with weak institutions. Third, a Rogoff-type conservative central banker is generally preferable to a mechanical inflation target of 1–4% and to most exchange-rate-based monetary arrangements. In equilibrium, the optimal degree of central bank conservatism is proportional to institutional quality. Thus, developing countries with lower institutional quality should have less conservative central bankers, and in the limit, when weak institutions make collection of tax revenue infeasible, the optimal degree of conservatism is zero. Fourth, we consider the political economy of strengthening institutions. In particular, we ask whether forcing a government not to rely too much on the inflation tax through external pressure (e.g., conditionality in an IMF program) could induce it to improve institutional quality, e.g., to fight corruption. The answer is probably not. One interesting result is a poor-institution trap. That is, when the initial quality of institutions is sufficiently low, it would be difficult to induce the authorities to devote any effort to strengthen them. The paper proceeds as follows. Section 2 sets up the model. Section 3 compares various popular frameworks that implement a commitment regime, namely inflation targeting, fixed exchange rates, currency boards, and dollarization. It is shown that the relative desirability of these frameworks depends on the institutional quality. Section 4 analyzes the discretionary regime and examines a conservative central banker framework. Section 5 extends the basic model to allow for a Laffer curve effect in seigniorage revenue. Section 6 endogenizes the institutional quality from a political economy perspective. Section 7 concludes.

In this paper, we examine the effects of institutional quality on the desirability of several popular monetary regimes, including inflation targeting, exchange rate fixing, currency board, and a conservative central banker. The simple model of a monetary policy game, whereby institutional quality adversely affects the taxable revenue, has generated a number of interesting results. First, we cast doubt on the conventional wisdom that prescribes pegged exchange rate regimes, currency boards and dollarization as means to increase the credibility of a government's resolve to maintain low inflation. Our analysis suggests that these monetary regimes may not be very credible themselves and can fail in countries where institutions are seriously weak. Second, an optimally chosen conservative central banker is generally preferable to a mechanical inflation target of 1–4% and to most exchange-rate-based monetary arrangements. The optimal degree of conservatism is proportional to the quality of institutions in the economy. Third, the presence of a Laffer curve effect on seigniorage revenue likely lowers inflation and raises tax rate, although in some cases it may raise both inflation and tax rates. Fourth, the notion that a low inflation target or a currency board can be used as an instrument to induce governments to strengthen institutions is questionable. These findings are important in the design of monetary policies for developing countries. A number of further extensions can be made. First, the government can be allowed to borrow in domestic bond market or international capital market. The interactions among institutional quality, debt, and monetary policies can be explored. Second, the effect of a Laffer curve in tax revenue as well as in seigniorage on inflation and tax rates is also interesting. Third, a systematic empirical examination can be illuminating. For example, is there support for Proposition 4 in the paper that the optimal degree of central bank conservatism depends positively on the institutional quality, and the elasticity of the aggregate demand with respect to the inflation surprise, but negatively on the elasticity of the aggregate supply to the distortionary tax rate? Does the dispersion in the experiences of developing and transition economies with inflation targeting reflect the insights of this model? These can be interesting and important topics for future research.