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

By Alex Mourmouras, Stabley W. Black, Charalambos Christofides

December 1, 2001

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Alex Mourmouras, Stabley W. Black, and Charalambos Christofides. Convertibility Risk: The Precautionary Demand for Foreign Currency in a Crisis, (USA: International Monetary Fund, 2001) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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).

Subject: Currencies, Currency markets, Demand for money, Exchange rates, Financial markets, Financial services, Foreign exchange, Money, Real interest rates

Keywords: Broad money, Convertibility, Currencies, Currency assets, Currency crisis, Currency demand schedules, Currency markets, Currency peg, Currency shift, Demand for money, Devaluation risk, Equation money demand equation, Exchange rates, Foreign currency, Interest rate, Interest rate defense, Money demand, Real interest rates, Threshold interest rate, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2001/210
Stock No:

WPIEA2102001
ISBN:

9781451874808
ISSN:

1018-5941

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