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

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. Copyright Blackwell Publishing Ltd 2004.