INVESTIGATING THE RELATIONSHIP BETWEEN MONEY LAUNDERING AND INFLATION IN PAKISTAN

Abstract

The aim of the study was to estimates the amount of money laundering and to estimate its effect on inflation in Pakistan. Firstly, the study estimated the amount of money laundering in Pakistan for a period of 1960-2014. It was found that about 3.8% of the Pakistan’s gross domestic product (GDP) was laundered in 1998 while in 2014 it was approximately 20% of GDP. For examining the relationship between estimated amount of money laundered and inflation in Pakistan, national consumption, investment, value added tax and employment rate were taken as control variables. Using the Auto-regressive Distributive Lag (ARDL) model, it was found that money laundering affected the inflation rate positively; as when there was an increase in the amount of money laundering by 1%, it increased the inflation rate in the economy by approximately 22%. The empirical results of the present study revealed that money laundering was one of the key factors contributing to high inflation rate in the economy. Hence, it is suggested that the prevailing Money Laundering Act (MLA) in the country should be strengthened and enforced strictly for controlling the inflation rate.