Cross-border deposits, aggregation, and money demand in the transition to EMU

This paper discusses the relevance of cross-border deposits (CBDs) for the stability of the relation between monetary aggregates and nominal GDP in the five largest EEC countries. The importance of the issue derives from two facts. Firstly, CBDs have recently increased sharply in many EEC countries, casting doubts on the adequacy of existing monetary aggregates that exclude them. Secondly, current monetary policy coordination within the EEC emphasizes the role of quantitative monetary indicators. The analysis is developed in terms of the “information content” of alternative money definitions (including or excluding selected subsets of CBDs), derived from a multicountry simultaneous system of money demand equations. We show that in the most recent period, traditional broad money aggregates are dominated by alternative money definitions that include CBDs, such as those based on the residency of the holder or on the currency of denomination. We also use the model to test hypotheses concerning multicountry aggregation of money demands.