Currency Substitution and the Demand for Money in Five European Union Countries Report as inadecuate

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The high degree of economic integration has led to an increased degree of currency substitution in the EU countries, which could bring instability in national money demand functions while an EU-wide money demand function could be more stable. Currency substitution usually takes the form of cross border deposits (CBD), which are not included in the traditional monetary aggregates. Thus, extended monetary aggregates that include the relevant CBDs are defined in this study. In order to investigate the implications of currency substitution for the stability of the demand functions, the traditional and extended monetary aggregates for five EU countries are defined in addition to EU-wide monetary aggregates. The estimated EU-wide demand for extended money appears to be stable suggesting that there is scope for monetary policy at the European level. However, the stability of the area-wide aggregate has been impaired when the relevant CBDs are not included.

Keywords: currency substitution ; cross border deposits ; extended monetary aggregates ; demand for money ; vector autoregression

Subject(s): Financial Economics

Issue Date: 2003-11

Publication Type: Journal Article

DOI and Other Identifiers: Print ISSN 1514-0326 (Other)

Online ISSN 1667-6726 (Other)

PURL Identifier: Published in: Journal of Applied Economics, Volume 06, Number 2 Page range: 361-383

Total Pages: 23

JEL Codes: E41; F33; E52; E47

Record appears in: Universidad del CEMA > Journal of Applied Economics

Author: Yildirim, Julide


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