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Does easy availability of cash effect corruption? Evidence from panel of countries

Singh, Sunny and Bhattacharya, Kaushik (2016): Does easy availability of cash effect corruption? Evidence from panel of countries.

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Using annual panel data of 54 countries for the period 2005-14, we examine whether currency in circulation, both in aggregate and in large denominations, affects the level of corruption in a country. Standard panel data models suggest that the ratios of (i) aggregate currency in circulation to M1 and, (ii) large denominated banknotes to M1 are both statistically significant determinants of corruption. Tests for reverse causality within a panel Granger framework reveal uni-directional causality of corruption with the first variable, but a bi-directional one with the second one. These findings suggest that limitations of supply of banknotes of large denomination, inter alia, could be a tool to fight corruption and brings to the fore the important role of payment system, extending an earlier study by Goel & Mehrotra (2012). The results also highlight that along with government, the central bank of an economy can also play an important role in the fight against corruption.

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