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Measuring Substitution in Monetary-Asset Demand Systems

George Davis and Jean Gauger

Journal of Business & Economic Statistics, 1996, vol. 14, issue 2, 203-08

Abstract: The Allen elasticity of substitution (AES) is widely used to study monetary asset substitution and structural demand stability. C. Blackorby and R. R. Russell (1989) show that the AES is uninformative and that the Morishima elasticity of substitution (MES) is the appropriate measure, a point overlooked in the monetary literature. Use of improper measures can lead to incorrect inferences. This paper considers five alternative measures of substitution: the AES; MES; the Hicksian and Marshallian elasticities of demand; and Y. Mundlak's unencountered, but appealing, constant cost elasticity of substitution. Selection of the substitution measure appropriate to respective research questions is addressed.

Date: 1996
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