Semi‐Nonparametric Estimates of Currency Substitution: the Demand for Sterling in Europe

Leigh Drake and Adrian R. Fleissig

Review of International Economics, 2004, vol. 12, issue 3, 374-394

Abstract: 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.

Date: 2004
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