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Money laundry and financial development

  • Buscemi, Antonino
  • Yallwe, Alem Hagos

Abstract This study is the novel in analyzing the relationship between money laundry and financial development and also the contribution of financial development in promoting for the occurrence of illegal transactions originated from domestic or foreignmarket. Moreover, the study tried to create link between the theoretical issues of financial development and money laundry with the empirical result using a two period model. The estimation made using the General Moment Method(GMM) for the panel data from 1985 to 2008.We included six countries in our sample: Italy, Switzerland, India, China,Ethiopia and Kenya.We have used the Phillips-Perron(PP) method of testing unit root because of its advantage over the Augmented Dickey Fuller (ADF). To test the number of cointegrating relationships among variables or to determine whether any combinations of the variables are cointegrated,the study employed the Johansen cointegration testing approach. The basic approach uses tax variable in order to determine the illegal currency in circulation. However, in this study we used the level of financial development as a principal factor for increasing or decreasing currency in circulation. Our assumption is, the level of financial development trigger for the demand of money(circulation of money) and consequently promote the occurrence of money laundry. Our regression result exhibited the level of financial development have a significant contribution for increasing demand for money that could be used for legal and illegal transactions. In countries where well(less) financial development exist, the more(less) exposed environmentfor the occurrence of illegal transactions(i.e. money laundry).

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33089.

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Date of creation: 08 Jun 2011
Date of revision: Jul 2011
Publication status: Published in Antiriciclaggio & 231 del 2001 ISSN 0(2011): pp. 233-264
Handle: RePEc:pra:mprapa:33089
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