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Should the Hypothesis of a Well Defined and Stable World Demand for M1 be Reinstated?
Simple Considerations and Tests
Credit and Capital Markets – Kredit und Kapital, Vol. 18 (1985), Iss. 2 : pp. 193–203
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Franco Spinelli, Milano
References
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Abstract
Should the Hypothesis of a Well Defined and Stable World Demand for M1 be Reinstatet?
Currency substitution is said to lead to instabilities in demand for individual currencies and undermine the attempts by the national monetary authorities to monitor the economy by keeping domestic monetary growth on a steady path. According to various analysts, what is needed under these circumstances is control over the world money stock. Central to these analyses is the hypothesis of the existence of a well defined and stable world money demand. The purpose of this paper is to see whether this hypothesis is analytically and empirically valid. It is devided into two major sections. The former is analytical and indicates the circumstances under which it might or might not be correct to make use of the concept of world money demand and expect such demand to be stable. In particular, it stresses that in a world under flexible exchange rates and with systematic deviations from PPP, one should be aware of the weakness of this concept. The latter section gives a few empirical results. It turns out that the evidence does not support the hypothesis of a well defined and stable world money demand.