Estimating the relationship between money laundering and growth

Abstract

Although the concept of money laundering dates back centuries, it is only relatively recently that this has gained importance and traction within an international context. This paper seeks to build on previous literature pertaining to the estimation of the relationship between money laundering and economic growth for three European countries; Cyprus, Luxembourg and Malta. An Ordinary Least Squares linear regression model has been applied. This dissertation factors in other well-known determinants of economic growth into the regression in an attempt to accurately identify the relationship between growth and dirty money. Such determinates include exports, gross fixed capital formation and employment. Results indicate that when all variables are expressed in growth terms, in Cyprus, 70.60% of the variance in the real GDP growth rate can be explained by the variation of laundered money, real exports, real GFCF and employment. Similarly, in Luxembourg, 61.28% of the variation in real GDP growth rate can be explained by the aforementioned variables, and for Malta this intensifies to 78.64%. It is only Luxembourg which exhibits a statistically significant variable for money laundering, and only when variables are presented in non-growth terms.