An Inter-Temporal Model of Dirty Money

Abstract

Presents a basic model by which a representative agent chooses how to allocate his savings optimally between money of legal origin and dirty money; he holds the laundered dirty money, from which the money laundering process generates a positive transaction cost. Analyses the welfare of such an economy as a result of money laundering, also the conditions for reducing the incentives for this transforming of illegal into legal money: the incentive can be minimised if the effectiveness of anti‐money laundering increases. Concludes that the welfare of an economy where there is only legal money is greater than one in which legal and illegal activities coexist.