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In this paper, we reassess the link between corruption, economic growth and inflation. To this end, we build an endogenous-growth model with transaction costs in which a corruption sector allows households evading from taxation. Two main results emerge. First, the relation between corruption and inflation is U-shaped, contrasting with the positive relation obtained in Al-Marhubi (2000) and Blackburn et al. (2011). This nonlinear relationship between corruption and inflation is confirmed by empirical evidence. Second, from monetary policy perspective, corruption increases the growth-maximizing seigniorage rate, and, unlike Paldam (2002) and Braun and Di Tella (2004), our model produces a negative association between seigniorage and corruption.
