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Currency Substitution in a Currency Board Context: The Evidence for Hong Kong

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  • Kwan Wai Ko
  • Jagdish Handa

Abstract

Hong Kong is an open economy that uses foreign currencies extensively in domestic payments. This paper focuses on substitution between the domestic and foreign currencies in their role as media of payments in such an economy. It uses quarterly data to estimate currency substitution (CS) for Hong Kong during 1984:I to 2001:III when it had a fixed exchange rate under a currency board system. Two models, a money demand function and a dynamic adjustment model, are estimated using the Johansen cointegration and error-correction technique. The estimates for both these models indicate significant CS in the media of payments. Our estimates also show a significant ratchet effect in CS.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Chinese Economic and Business Studies.

Volume (Year): 4 (2006)
Issue (Month): 1 ()
Pages: 39-56

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Handle: RePEc:taf:jocebs:v:4:y:2006:i:1:p:39-56

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Keywords: Currency substitution; currency board; China;

References

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  1. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  2. Lewis, Mervyn K. & Mizen, Paul D., 2000. "Monetary Economics," OUP Catalogue, Oxford University Press, number 9780198290629, September.
  3. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  4. Joannes Mongardini & Johannes Mueller, 2000. "Ratchet Effects in Currency Substitution: An Application to the Kyrgyz Republic," IMF Staff Papers, Palgrave Macmillan, vol. 47(2), pages 3.
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