The Implications Of Cross Border Monetary Aggregation

The Implications of Cross-Border Monetary Aggregation

Some recent studies suggest the possibility of estimating a stable aggregate demand-for-money relationship for the group of countries participating in the European Monetary System. These results are of particular relevance in connection with the task of setting policy targets for a European Central Bank. This paper uses a theoretical error-invariables framework to identify what is gained and what may be lost through cross-border aggregation of money demand. It provides an analytical basis for such studies, paying particular attention to currency substitution and international portfolio diversification.

Currency Substitution and Cross-Border Monetary Aggregation

Is there a stable aggregate money demand relationship for Europe? If so, why, and if not, why not? These questions are important for the implementation of policy by a European central bank, as well as for the appropriate speed of transition to EMU. This paper addresses them in a multi-country empirical study of money demand for the G-7 countries during the period since 1973. It looks for evidence of currency substitution and tests the restrictions implied by cross-border aggregation within Europe.

The Implications of Cross-border Monetary Aggregation