The relationship between bureaucratic corruption and financial crisis in an open economy

Abstract

This paper contributes to that debate via a novel examination of the relationships among bureaucratic corruption, growth, and financial crisis in an open economy, using a two-period small open economy model. The outcome shows that the uncertainties created by corruption in such an economy constitute a double-edged sword. That is, when the economy is prosperous, corruption can ‘grease’ the economic system and infuse some motive power into economic activities, and thus help to boost growth. Contrarily, if the economy is experiencing a depreciation, corruption could turn to be an obstacle to growth and even contribute meaningfully to financial crises.