An Inter-Temporal Model of Dirty Money

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. © 2005, Emerald Group Publishing Limited.