P. Spencer, MONETARY INTEGRATION AND CURRENCY SUBSTITUTION IN THE EMS - THE CASE FOR A EUROPEAN MONETARY AGGREGATE, European economic review, 41(7), 1997, pp. 1403-1419
This paper examines the phenomenon of cross-currency substitution and
the validity of monetary aggregation within the European Monetary Syst
em using non-parametric methods which exploit the relationship between
intergroup substitution and separability. The separability property i
s tested using the methodology developed by Varian ('The Nonparametric
Approach to Demand Analysis', Econometrica 50, 945-974, 1982; 'Nonpar
ametric Tests of Consumer Behaviour', Review of Economic Studies 51, 9
9-110, 1983) and is violated in the case of most European countries, s
uggesting that the hypothesis of zero currency substitution which form
s the basis of national monetary aggregation should be rejected. The r
esults do however validate the use of monetary aggregates for the EMS
as a whole, and I use a standard parametric demand for money approach
to compare the performance of an EMS divisia index with that of simple
sum aggregates during the 1980s and 1990s. (C) 1997 Elsevier Science
B.V.