Annals of Finance

, Volume 2, Issue 2, pp 141–165 | Cite as

Convertibility risk: the precautionary demand for foreign currency in a crisis

  • Stanley W. Black
  • Charis Christofides
  • Alex Mourmouras
Research Article

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 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% points,equivalent to the loss of reserves of $6–7.5 billion (or about 30% of reserves as measured at end-November 1997).

Keywords

Convertibility risk Currency crisis Demand for money Currency substitution International reserves Korea 

JEL Classification Numbers

E4 F3 

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Copyright information

© Springer-Verlag 2005

Authors and Affiliations

  • Stanley W. Black
    • 1
  • Charis Christofides
    • 2
  • Alex Mourmouras
    • 3
  1. 1.Department of EconomicsUniversity of North CarolinaChapel HillUSA
  2. 2.Room HQ1-13-215, Office of the Executive DirectorsInternational Monetary FundWashingtonUSA
  3. 3.Room HQ2-4-781, IMF InstituteInternational Monetary FundWashingtonUSA

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