The Consequences of Corruption on Inflation in Developing Countries: Evidence from Panel Cointegration and Causality Tests

Round 1

Reviewer 1 Report

The revised article evaluates the relationship between inflation and corruption in a set of developing countries, concluding that such a relationship exists.

In my opinion, the article uses the appropriate methodology to meet the objective of the research, in addition to carrying out a sufficient bibliographical review.

Author Response

    Dear Reviewer,

    We would like to extend our gratitude for reviewing our paper and contributing to the improvement of it. The text was proofread for grammar as it had been asked and necessary corrections were made. You can find the certificate showing that the text was proofread by the MDPI editing service.

    We hope that you will find the revisions we made in accordance with your valuable comments adequate.

Sincerely

Reviewer 2 Report

Report on: The consequences of corruption on
in‡ation in developing countries: Evidence from
panel cointegration and causality tests.
This is a potentially important paper which will interest many readers. It it seems
to contain substantive results about an important issue in economics.
The paper’s exposition need to be improved, and the analysis clari…ed at a few
important points, which should be clear from the detailed comments below.
Detailed remarks
line 245 and equation 1. The model is not completely speci…ed without a clear
statement about the properties of the disturbance term in the model equation (1)
Table 1. Indicate where you intend to make the data available when this work
has been published.
Line 256: You can’t rationalize a positive sign for the coe¢ cient of the GDPC
variable with reference to an output gap, when such a variable is not in the model
equation. And since a simple deterministic trend, or H-P trend, is used in any case
in literature that you refer to, it should be very easy enough to include.
Line 296-304. More important than giving the expressions for the statistics,
is to be very clear about the (asymptotic I guess) distributions under the relevant
null-hypotheses. I don’t …nd anything now.
Table 2. Clarify meaning of Probability column. It it p-value ?
Line 312: “These twomethods check the stationary in the null hypothesis”. Do
you mean: “The two statistics can be used to test the null hypothesis of stationarity
...”?
Note to Table 3: “... ; and  indicate acceptance of null hypotheses”. I do
not understand what you mean here.
Line 346: You mean “independent”?
Line 361-365. As remarked above: Include at least a proxy for the trend in
GDP to see if the interpretation gets any support.
Line 372: Engle and Granger did not argue. They showed logically that
Granger causality must be present, at least one-way.
Equation (6) and (7): Cointegration implies ECMs for the other variables as
well.
Line 380. I have not seen that interpretation before. You mean ^eit?
The English, as far as I can tell, need to be overhauled. The following is just
a few observations
line 22: “economics”, not “economy”.
line 36-37: The sentence starting with “However, with the measurement ...”
does not covey a clear meaning
line 40: Change “performed”to “made”.
line 107: The sentence is incomplete.
line 119: bi-directional. The usual word used in this context is two-way
line 246: “the variables of”can be deleted.
line 259: Avoid boldface for symbols when not needed. It looks cluttered.
line 279: “investigated”or “tested”will be better than “controlled”.
This list is not complete, there are many more to be considered carefully.

Comments for author File: Comments.pdf

Author Response

Dear Reviewer,

First, we would like to extend our gratitude for reviewing our paper and contributing to the improvement of it. The paper has been revised following your comments and suggestions. The text also was proofread for grammar as it had been asked and necessary corrections were made. You can find the certificate showing that the text was proofread by the MDPI editing service.

Below is a summary of the changes we performed:

1.       You can’t rationalize a positive sign for the coefficient of the GDPC variable with reference to an output gap, when such a variable is not in the model equation. And since a simple deterministic trend, or H-P trend, is used in any case in literature that you refer to, it should be very easy enough to include.

We would like to thank you for attracting our attention to this point. You mentioned that in the long-term equation, it would be more appropriate to add deterministic trend or H-P trend that could represent output gap instead of the GDP per capita variable. In line with your suggestion, in the long-term equation, instead of the GDPPC variable, we added the GDPGAP variable which was generated using the H-P method. With the inclusion of the output gap variable, the stages of cross section dependence, unit root, co-integration and parameter estimation were repeated. Based on the new results, all the interpretations in the manuscript were reviewed.

2.       line 245 and equation 1. The model is not completely specified without a clear statement about the properties of the disturbance term in the model equation (1)

The properties of error term were added to the explanations to Equation 1.

3.       More important than giving the expressions for the statistics, is to be very clear about the (asymptotic I guess) distributions under the relevant null-hypotheses. I don’t understand anything now.

Information about the distribution of the statistics under the relevant null hypothesis is included in the manuscript.

4.       Clarify meaning of Probability column. It it p-value?

The expression “probability value” in Table 2 was changes with p-value.

5.       ***, ** and * indicate acceptance of null hypothesis. I do not understand what you mean here.

The note to Table 3 was changed as “***, ** and * indicate that the variable has unit root at 1, 5, and 10 percent levels of significance, respectively”.

We hope that you will find the revisions we made in accordance with your valuable comments adequate.

Sincerely

Reviewer 3 Report

The topic of the relationship between inflation levels and corruption is a important one especially as the IMF begins to consider how to incorporate corruption risks into its country evaluations. I leave it to statistically sophisticated readers to evaluate the methodology, but I have several other concerns. First, the English writing style, especially on the first two pages, is weak and needs serious editing. It is usually understandable, but it is awkward and sometimes there are errors of grammar or usage. I will send the editors a scan of pages one and two to give them an idea of the problems.

Second, the theoretical background and the literature review seems adequate.The authors' stress on the bi-directional link between corruption and inflation very important.

Third, the discussion of the data is inadequate. Mauro did not "draw up" the data set he used. Rather he obtained it from Business International,  business consultancy, and it was for only one year (consult the original article in the QJE). The authors say the three indices they cite are "known" to be the most reliable, but by whom? True, the three are often used, but they are not really three distinct measures. The CPI and the World Bank's index are derived mostly from the same, often poorly documented, sources. I do not know what the Heritage Foundation does, but it seems that they use the CPI data, and the CPI does use BI as one of the sources that it aggregates. What does the Heritage Foundation do to tweak the CPI, and why is their index better? Furthermore, the numbers are indices not cardinal numbers so the difference between 80 and 90 is not necessarily the same as the difference between 20 and 30. Thus, at the very least the authors need to be more reflective about the limits of the data.

Fourth, the estimation techniques need to be assessed by a specialist on the methods, and that is not me.

Fifth, the key result is in table 6 that shows that the causation appears to go from corruption to inflation in 8 countries and from inflation to corruption in 4 and both ways in Indonesia (at high levels of significance). This is a interesting result that needs much more discussion and reflection.I am,however, skeptical.  The indices used by the authors are of doubtful value when used a time series for individual countries. Most country scores are pretty stable over time and there are only 20 years of data. How much variation actually occurs in individual country indexes? My guess is not much.Hence not much is being explained. Thus it is not clear to me that anything important has been explained. There is a high burden of proof on the authors to show that the results matter and to attempt to explain the variation across countries.

Author Response

Dear Reviewer,

First, we would like to extend our gratitude for reviewing our paper and contributing to the improvement of it. The paper has been revised following your comments and suggestions. The text also was proofread for grammar as it had been asked and necessary corrections were made. You can find the certificate showing that the text was proofread by the MDPI editing service.

In line with your report, in our article, we included information about the limitations of the corruption measurements used in the literature. We also explained why we chose the Freedom from Corruption indicator as the measurement of corruption.  

We would like to thank you for your comment on the causality analysis as well. Your comment on the bilateral causality relationship that particularly emerged in the Indonesia case is highly critical.  Time series analyses are more reliable in examining causality relationships compared to the panel data analysis methods. However, since the corruption variable did not have enough observations to carry out time series analysis, we could not employ this method in our analysis.

We hope that you will find the revisions we made in accordance with your valuable comments adequate.

Sincerely,

Reviewer 4 Report

This article is intellectually and empirically sound, and offers a new dimension to analysis of consequences of corruption: in this case the impact on inflation. 

The article demonstrates a connection between corruption and inflation, but does not address two critical questions: a) how, and b) why.  These are the more substantial questions that would benefit the literature at this level of engagement.  

The authors would want to consider following up with this line of inquiry to add weight to their analysis.

Author Response

Dear Reviewer,

First, we would like to extend our gratitude for reviewing our paper and contributing to the improvement of it.

In your review report, you stated that we need to explain further how the relationship between inflation and corruption emerged. The theoretical framework regarding the relationship between these two variables is given in Section II. As explained in that section, the channels through which corruption leads to inflation can be summarized as follows:

Utilizing their public power, political parties increase public expenditures to be re-elected and to remain in power. However, financing the increasing public expenditures with tax increase is not well-received by the voters. Being aware of this fact, political authorities choose to finance the expenditures through emission increase, which leads to inflation. Furthermore, corruption prevents the effective distribution of financial and public resources across the country, and eventually decreases productivity. In order to cover the costs which increase due to loss of productivity, both domestic and foreign borrowing are seen as alternatives, which leads to an increase in interest rates and in the risk premium of the country. On the other hand, increasing emission as an alternative to domestic and foreign borrowing causes inflation. Moreover, an increase in the general level of prices in a country contributes to the emergence of illegal acts like theft and fraud. Due to the loss in purchasing power resulting from inflation, people start to search for ways to generate income using illegal means.

Lastly, the text was proofread for grammar as it had been asked and necessary corrections were made. You can find the certificate showing that the text was proofread by the MDP editing service.

We hope that you will find the revisions we made in accordance with your valuable comments adequate.

Sincerely,

Round 2

Reviewer 2 Report

I have no more problems with this paper.

Reviewer 3 Report

The revision has improved the English language and dealt with some of my concerns. However, I am still not convinced that the results mean very much given the severe data limitations— only 20 countries and very imperfect measures of corruption.