Measuring substitution in monetary-asset demand systems

The Allen elasticity of substitution (AES) is widely used to study monetary-asset substitution and structural demand stability. Blackorby and Russell showed that the AES is uninformative and that the Morishima elasticity of substitution (MES) is the appropriate measure, a point overlooked in the monetary literature. Use of improper measures can lead to incorrect inferences. This article considers five alternative measures of substitution-the AES, the MES, the Hicksian and Marshallian elasticities of demand, and Mundlak's unencountered, but appealing, constant-cost elasticity of substitution. Selection of the substitution measure appropriate to respective research questions is addressed.