Drug Money and Bank Lending: The Unintended Consequences of Anti-Money Laundering

March 2019

Tomas Williams, Pablo Slutzky, and Mauricio Villamizar-Villegas

IIEP Working Paper 2019-5

Abstract: We explore the unintended consequences of anti-money laundering (AML) policies. For identification, we exploit the implementation of the SARLAFT system in Colombia in 2008, aimed at controlling the flow of money from drug trafficking into the financial system. We find that bank deposits in municipalities with high drug trafficking activity decline after the implementation of the new AML policy. More importantly, this negative liquidity shock has consequences for credit in municipalities with little or nil drug trafficking. Banks that source their deposits from areas with high drug trafficking activity cut lending relative to banks that source their deposits from other areas. We show that this credit shortfall negatively impacted the real economy. Using a proprietary database containing data on bank-firm credit relationships, we show that small firms that rely on credit from affected banks experience a negative shock to investment, sales, size, and profitability. Additionally, we observe a reduction in employment in small firms. Our results suggest that the implementation of the AML policy had a negative effect on the real economy.

JEL Classification: K42, G18, G21

Keywords: money laundering; organized crime; financial system; bank lending; liquidity; economic growth

How ETFs Amplify the Global Financial Cycle in Emerging Markets

January 2018

Updated: September 2018

Tomas Williams, Nathan Converse, and Eduardo Levy-Yeyati.

IIEP Working Paper 2018-1

Abstract: Since the early 2000s exchange-traded funds (ETFs) have grown to become an important investment vehicle worldwide. In this paper, we study how their growth affects the sensitivity of international capital flows to the global financial cycle. We combine comprehensive fundlevel data on investor flows with a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. For dedicated emerging market funds, we find that the sensitivity of investor flows to global financial conditions for equity (bond) ETFs is 2.5 (2.25) times higher than for equity (bond) mutual funds. In turn, we show that in countries where ETFs hold a larger share of financial assets, total cross-border equity flows and prices are significantly more sensitive to global financial conditions. We conclude that the growing role of ETFs as a channel for international capital flows amplifies the incidence of the global financial cycle in emerging markets.

JEL Classification: F32, G11, G15, G23

Keywords: exchange-traded funds; mutual funds; global financial cycle; global risk; push and pull factors; capital flows; emerging markets

Do Fed Forecast Errors Matter?

August 2018

Tara Sinclair, Pao-Lin Tien, & Edward N. Gamber 

IIEP Working Paper 2016-14

Abstract: In order to make forward-looking policy decisions, the Fed relies on imperfect forecasts of future macroeconomic conditions. If the Fed’s forecasts are rational, then the difference between the actual outcome and the Fed’s forecast can be treated as an exogenous shock. We investigate the effect of the Fed’s forecast errors on output and price movements under the assumption that the Fed intends to implement policy through a forward-looking Taylor rule with perfect foresight. Our results suggest that although the absolute magnitude of the Fed’s forecast error shock is large, the impact of the shock on the macroeconomy is reassuringly small.

Keywords: Federal Reserve, Taylor rule, forecast evaluation, monetary policy shocks

JEL Classification: E32; E31; E52; E58

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