European monetary integration and the demand for money

This paper presents a cash-in-advance model of the demand for money. Money demand depends on the transaction services of money as well as on the risk and return properties of bonds in different currencies. The paper shows how the money demand function changes with the adoption of fixed exchange rates and monetary union, respectively. The model is then calibrated for a monetary union between France and Germany as well as between the Netherlands and Germany. The numerical results indicate substantial shifts in the behavior of the demand for money in response to monetary integration. (C) 1998 Elsevier Science Ltd. All rights reserved.