Semi-Nonparametric Estimates of Currency Substitution: The Demand for Sterling in Europe
21 Pages Posted: 21 Aug 2004
The paper presents new evidence of significant substitution between European domestic monetary assets and foreign holdings of sterling. The finding of significant cross-country currency substitution implies reduced costs of transition towards monetary union and easier European policy convergence. Elasticities of substitution, using the Morishima measure, are estimated from the semi-nonparametric Fourier flexible form.
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