Monetary interdependence between the United States and United Kingdom under alternative exchange rate regimes

The issue of monetary interdependence between the reserve-currency country (US) and the non-reserve-currency country (UK) is investigated under fixed and flexible exchange rate periods. For the fixed rate period, our investigations show that there existed monetary interdependence between the US and UK. For the flexible rate period, the results are sensitive to the definition of money used in the model. Some of our results indicate that US monetary action has no impact on UK money and income, whereas the others confirm the currency substitution argument that significant monetary interdependence is found between the US and UK. The empirical results do not show the striking contrast between fixed and flexible rate regimes which one might expect from the theory. The most striking result is that there was substantial and consistent causal influence from British incomes and money to US incomes and money in both time periods, while the influence in the opposite direction was consistently smaller.