How Do Macroeconomic Developments in Mainland China Affect Hong Kong's Short-term Interest Rates?
AbstractThis paper studies the significance of Mainland-related shocks in determining Hong Kong money market interest rates after controlling for the influences of US variables. Analysis using a vector auto-regression model suggests that an unexpected rise in the Mainland policy interest rate, or a higher-than-expected growth in Mainland output or money supply, in general produces a positive and hump-shaped effect on the three-month HIBOR. Forecast error variance decomposition shows that US shocks still dominate, but Mainland shocks have become more important in accounting for the unexpected fluctuations in HIBOR in recent years. A historical decomposition shows that from autumn 2003 to spring 2005 the large negative spread between HIBOR and LIBOR was mainly due to Mainland factors. Thus, while the HIBOR-LIBOR spread is expected to be bounded inside a band that reflects the width of the Convertibility Zone of the Linked Exchange Rate system, Mainland-related shocks could exert a significant influence on the actual size of the spread.
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Bibliographic InfoPaper provided by Hong Kong Monetary Authority in its series Working Papers with number 0717.
Length: 27 pages
Date of creation: Nov 2007
Date of revision:
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More information through EDIRC
Hong Kong; HIBOR; Linked Exchange Rate system;
Find related papers by JEL classification:
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-31 (All new papers)
- NEP-CNA-2008-05-31 (China)
- NEP-MAC-2008-05-31 (Macroeconomics)
- NEP-MON-2008-05-31 (Monetary Economics)
- NEP-OPM-2008-05-31 (Open Economy Macroeconomic)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Foreign Versus Domestic Factors as Souces of Macroeconomic Fluctuations in Hong Kong,"
172003, Hong Kong Institute for Monetary Research.
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- Tony Latter, 2007. "Rules versus discretion in managing the Hong Kong dollar, 1983-2006," Working Papers 022007, Hong Kong Institute for Monetary Research.
- Dong He & Zhiwei Zhang & Honglin Wang, 2009. "Hong Kong's Financial Market Interactions with the US and Mainland China in Crisis and Tranquil Times," Working Papers 0910, Hong Kong Monetary Authority.
- Hong Kong Monetary Authority, 2008. "Capital flows into and out of Hong Kong SAR: implications for monetary and financial stability," BIS Papers chapters, in: Bank for International Settlements (ed.), Financial globalisation and emerging market capital flows, volume 44, pages 207-219 Bank for International Settlements.
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