Convertibility Risk: The Precautionary Demand for Foreign Currency in a Crisis
IMF Working Papers, December 1, 2001
Source details
- Canonical URL
- Convertibility Risk: The Precautionary Demand for Foreign Currency in a Crisis
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Bibliographic details
- Authors: Alex Mourmouras, Stabley W. Black, Charalambos Christofides
- Published: December 1, 2001
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451874808.001
Theoretical framework
- Links money demand to household perceptions of risk that:
- domestic currency may become inconvertible, or
- domestic currency may be devalued.
- Develops an augmented demand-for-money equation that incorporates convertibility/devaluation risk into standard money-demand determinants.
Empirical approach
- Uses both cross-section data and monthly data for Korea.
- Estimates an augmented demand-for-money equation to quantify the effect of convertibility risk on money demand.
Key empirical findings
- The fear of inconvertibility arising from the 1997 Korean currency crisis may have caused broad money demand to fall by 4-5 percentage points.
- The fall in broad money demand is equivalent to a loss of reserves of $6-72 billion.
- The reserve loss estimate corresponds to about 30 percent of reserves as measured at end-November 1997.
Subject areas and keywords
- 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
Content in this bundle
- Convertibility Risk: The Precautionary Demand for Foreign Currency in a Crisis - WP/01/210