Where does “dirty” money go? A gravity analysis

Valentina Gullo () and Pierluigi Montalbano
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Valentina Gullo: Memotef, Sapienza University of Rome (IT).

No 5/18, Working Papers from Sapienza University of Rome, DISS

Abstract: The applied literature on illicit (“dirty”) money flows looks at the gravity equation as a natural strategy to control for characteristics of both “source” and “destination” countries. Unfortunately, the existing empirical literature on dirty money flows lacks solid theoretical underpinnings. We contribute to this literature in several ways: i) we exploit the theory of portfolio investment flows to estimate robust parameters (by applying both LSDV PPML techniques) on financial flows on a global scale ii) we derive a global picture of anomalous (i.e. unpredicted) money flows over time; ii) we identify possible correlations between these anomalous flows and “dirty money” determinants. Our results show that theoretical based gravity models provide a more robust way to look at “dirty” money flows than their ad hoc counterparts and open the ground to key policy implications: i) instead of spending time and effort tracing the exact path of “dirty” money flows, a global map of anomalous financial activities can be built by exploiting official statistics; ii) rather than focusing only on “off-shore financial centers”, we could assess the attractiveness to dirty money flows of each destination to a given origin by exploiting bilateral flows and the characteristics of their dyadic relationship.

Keywords: Gravity model; financial flows; dirty money; offshore financial centers; financial secrecy. (search for similar items in EconPapers)
JEL-codes: C01 F38 G15 (search for similar items in EconPapers)
Date: 2018-07
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