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Money demand stability and currency substitution in six European countries (1980-1992)

  • Renato Filosa
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    This paper discusses the main potential sources of instability of money demand in Europe originating from institutional changes in the financial system and currency substitution. Money demand equations might appear unstable if the dynamic specifications are too rigid. This can largely be overcome by using error-correction models. Once this model is applied, money demand in the countries reviewed is reasonably stable and economically well behaved. Estimations show that currency substitution is an important feature of financial behaviour in Europe. It supports the proposition that an EC-wide money stock would possess stability properties superior to individual countries' money demand.

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    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 30.

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    Length: 62 pages
    Date of creation: Nov 1995
    Date of revision:
    Handle: RePEc:bis:biswps:30
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    1. Timothy D. Lane & Stephen S. Poloz, 1992. "Currency Substitution and Cross-Border Monetary Aggregation; Evidence From the G-7," IMF Working Papers 92/81, International Monetary Fund.
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    5. Mizen, Paul & Pentecost, Eric J, 1994. "Evaluating the Empirical Evidence for Currency Substitution: A Case Study of the Demand for Sterling in Europe," Economic Journal, Royal Economic Society, vol. 104(426), pages 1057-69, September.
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    7. von Hagen, Jürgen, 1992. "Monetary Union, Money Demand and Money Supply: A Review of the German Monetary Union," CEPR Discussion Papers 719, C.E.P.R. Discussion Papers.
    8. McKinnon, Ronald I, 1982. "Currency Substitution and Instability in the World Dollar Standard," American Economic Review, American Economic Association, vol. 72(3), pages 320-33, June.
    9. Luca PAPI & Carlo MONTICELLI, 1995. "EU-Wide money demand: An assessment of competing approaches," Working Papers 63, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    10. Rose, Andrew K. & Svensson, Lars E. O., 1994. "European exchange rate credibility before the fall," European Economic Review, Elsevier, vol. 38(6), pages 1185-1216, June.
    11. David F. Hendry & Neil R. Ericsson, 1990. "Modeling the demand for narrow money in the United Kingdom and the United States," International Finance Discussion Papers 383, Board of Governors of the Federal Reserve System (U.S.).
    12. James Boughton, 1992. "International comparisons of money demand," Open Economies Review, Springer, vol. 3(3), pages 323-343, October.
    13. Angeloni, Ignazio & Cottarelli, Carlo & Levy, Aviram, 1994. "Cross-border deposits, aggregation, and money demand in the transition to EMU," Journal of Policy Modeling, Elsevier, vol. 16(1), pages 27-54, February.
    14. Philippe Jeanfils, 1994. "Agrégats monétaires, cointégration et stabilité: le cas belge," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 142, pages 153-201.
    15. Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992. "The Power of Cointegration Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 325-48, August.
    16. James G. MacKinnon, 2010. "Critical Values for Cointegration Tests," Working Papers 1227, Queen's University, Department of Economics.
    17. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107, March.
    18. Marc Quintyn, 1991. "From Direct to Indirect Monetary Policy Instruments; The French Experience Reconsidered," IMF Working Papers 91/33, International Monetary Fund.
    19. Peter B. Kenen & Tamim Bayoumi, 1992. "Using An EC-Wide Monetary Aggregate in Stage Two of EMU," IMF Working Papers 92/56, International Monetary Fund.
    20. James M. Boughton & George S. Tavlas, 1990. "Modeling money demand in large industrial countries: buffer stock and error correction approaches," Proceedings, Federal Reserve Bank of Cleveland, pages 433-467.
    21. George S. Tavlas & James M. Boughton, 1991. "What Have We Learned About Estimating the Demand for Money? a Multicountry Evaluation of Some New Approaches," IMF Working Papers 91/16, International Monetary Fund.
    22. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
    23. Muscatelli, Vito Antonio & Papi, Luca, 1990. "Cointegration, Financial Innovation and Modelling the Demand for Money in Italy," The Manchester School of Economic & Social Studies, University of Manchester, vol. 58(3), pages 242-59, September.
    24. Cuddington, John T. & Cuddington, John T., 1983. "Currency substitution, capital mobility and money demand," Journal of International Money and Finance, Elsevier, vol. 2(2), pages 111-133, August.
    25. David Barr, 1992. "The Demand for Money in Europe: Comment on Kremers and Lane," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 718-729, September.
    26. Stefan Gerlach, 1994. "German unification and the demand for German M3," BIS Working Papers 21, Bank for International Settlements.
    27. Angelini, P. & Hendry, D.F. & Rinaldi, R., 1993. "An Econometric Analysis of Money Demand in Italy," Papers 219, Banca Italia - Servizio di Studi.
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