Macroeconomic Implications of Money Laundering

WP/96/66-EA

Macroeconomic Implications of Money Laundering by Peter J. Quirk


Money laundering and measures to counter it have become the focus
of an intense international effort. Evaluation of the resource costs and
benefits of the countermeasures depends in part on an understanding of
the macroeconomic effects of money laundering. The wide range of activities
and financial instruments involved in money laundering is not directly
observable, and comprehensive, microeconomic-based estimates are difficult
to compile. Indirect, macroeconomic-based techniques that involve
estimating the extent of money laundering are, therefore, the focus of most
empirical work. This paper introduces an international cross-section
econometric examination of the role of money laundering, tax evasion, and
employment opportunities in determining monetary behavior, and concludes
that money laundering has a significant role. A shift is detected from
the use of currency in the 1980s to noncash money laundering in the 1990s.

The economic literature suggests that money laundering can distort
economic data and thus distort macroeconomic analysis and policymaking.
In addition, there may be direct effects on saving resulting from induced
changes in income distribution and from the erosion of confidence in
financial markets. The paper reports a first attempt at econometric
estimation to link differences in economic growth rates among industrial
countries to crime as a proxy for money laundering; some evidence is found
of a depressant effect on growth.

Finally, the paper examines the implications for economic policymakers.
Freedom to launder money could promote private economic welfare for some
while undermining social welfare. Public policy considerations, therefore,
suggest an antilaundering role for financial institutions involved in
prudential banking supervision, tax evasion monitoring, statistical
reporting, and legislation. However, in order to minimize the negative
consequences for macroeconomic efficiency, care must be taken in designing
the form of the interventions.