Corruption and business cycle volatility: a corporate governance perspective

This study develops a model arguing that corruption and weak corporate governance institutions magnify economic fluctuations. Corruption increases the difficulty of corporate governance and decreases the costs to controlling families of misusing firm assets as collateral for bank loans and creating credits for their own high-risk business, thus increasing cyclical fluctuations in inflation and production. Consistent with the predictions of the model, our longitudinal analyses covering 155 countries from 1995 to 2015 suggest that corruption increases the Hodrick-Prescott cyclical volatility of inflation and production in the following 10years. We also find that inflation volatility mediates the relationship between corruption and production volatility. However, corruption does not show significant effects on unemployment fluctuations.