Economic and Monetary Integration and the Aggregate Demand for Money in the EMS

Aggregate demand for M1 in the countries participating in the exchange rate mechanism (ERM) of the European Monetary System is shown to be a stable function of ERM-wide income, inflation, interest rates, and the ECU-dollar exchange rate. Particularly noteworthy is the rapid dynamic adjustment, in contrast to the implausibly slow adjustment implied by most single-country estimates. These results, if robust, suggest that, even at the present stage of economic and monetary integration, a European central bank might be able to implement monetary control more effectively than the individual national central banks.