Arnold, Ivo J. M., “The Derivation of the Liquidity Ratio in the EMS: Comment on Kremers and Lane,” Staff Papers, Vol. 39 (March 1992), pp. 195–202.
Kremers, Jeroen J.M., and Timothy D. Lane, “Economic and Monetary Integration and the Aggregate Demand for Money in the EMS,” Staff Papers, Vol. 37 (December 1990), pp. 777–805.
Jeroen J.M. Kremers is with the Ministry of Finance, the Netherlands, and is also a visiting professor at Erasmus University, Rotterdam (OCFEB).
Timothy D. Lane is an Economist in the Research Department.
1985 PPP rates are also used by the OECD to aggregate real variables; see OECD (1991, Part Two, “Main Aggregates: Zones”).
This is the equivalence that Arnold correctly describes in Section II of his comment; where he is incorrect is in failing to recognize that we also use this method to aggregate real GDP.
Price indices for country zones are calculated by the OECD on the same basis: see OECD (1991, Part Four, “Growth Triangles: Zones”).
In a paper now in preparation, we consider the theoretical implications of aggregating across countries and analyze an extended data set.