Corruption and the exchange rate regime

A fixed exchange rate regime is a sign of an authoritarian and weaselly government nowadays. Letting your currency float lets markets freely show when policies are weak. Governments who are afraid of showing such weakness either get a fixed exchange rate regime or announce a floating one and in practice manage it to make it look stable as a fixed one. This is the so-called fear of floating, common among corrupt governments. This would indicate that the choice of the exchange rate regime could be determined by the political regime. Could the causality run the other way?

Katherina Popkova studies this question and finds the rather striking result that it makes sense to have an fixed exchange rate when you are corrupt and corruption has a strongly positive impact on output. The logic is that in such circumstances taxation is not that much distorting, thus seigniorage can be efficiently replaced by taxes. That said, some may argue that it is a silly idea to mention that corruption may have a positive impact on output. Yet, it is far from empirically settled whether corruption has a positive or negative impact.