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Convertibility Risk: The Precautionary Demand for Foreign Currency in a Crisis

Author

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  • Mr. Alex Mourmouras
  • Mr. Stabley W. Black
  • Mr. Charalambos Christofides

Abstract

This paper presents theoretical work linking money demand to the perceptions of households about the risk that domestic currency may become inconvertible or that it may be devalued. An empirical investigation of the size of this effect is carried out using both cross section data and then monthly data for Korea to estimate an augmented demand for money equation. It is found that the fear of inconvertibility arising from the 1997 Korean currency crisis may have caused broad money demand to fall by 4-5 percentage points, equivalent to the loss of reserves of $6-72 billion (or about 30 percent of reserves as measured at end-November 1997).

Suggested Citation

  • Mr. Alex Mourmouras & Mr. Stabley W. Black & Mr. Charalambos Christofides, 2001. "Convertibility Risk: The Precautionary Demand for Foreign Currency in a Crisis," IMF Working Papers 2001/210, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2001/210
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    References listed on IDEAS

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    1. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
    2. Flood, Robert P. & Jeanne, Olivier, 2005. "An interest rate defense of a fixed exchange rate?," Journal of International Economics, Elsevier, vol. 66(2), pages 471-484, July.
    3. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    4. Mr. Atish R. Ghosh & Ms. Gabriela Basurto, 2000. "The Interest Rate-Exchange Rate Nexus in the Asian Crisis Countries," IMF Working Papers 2000/019, International Monetary Fund.
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    Cited by:

    1. Sergey Narkevich & Pavel Trunin, 2012. "Reserve Currencies: Factors of Evolution and their Role in the World Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 162P.

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