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How Do Macroeconomic Developments in Mainland China Affect Hong Kong's Short-term Interest Rates?

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Author Info

  • Dong He

    (Research Department, Hong Kong Monetary Authority)

  • Frank Leung

    (Research Department, Hong Kong Monetary Authority)

  • Philip Ng

    (Research Department, Hong Kong Monetary Authority)

Abstract

This 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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File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP07_17_full.pdf
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Bibliographic Info

Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0717.

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Length: 27 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:hkg:wpaper:0717

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Keywords: Hong Kong; HIBOR; Linked Exchange Rate system;

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References

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  1. Hans Genberg & Li-gang Liu & Xiangrong Jin, 2006. "Hong Kong's Economic Integration and Business Cycle Synchronisation with Mainland China and the US," Working Papers 0611, Hong Kong Monetary Authority.
  2. Hans Genberg, 2003. "Foreign Versus Domestic Factors as Souces of Macroeconomic Fluctuations in Hong Kong," Working Papers 172003, Hong Kong Institute for Monetary Research.
  3. Tony Latter, 2007. "Rules versus discretion in managing the Hong Kong dollar, 1983-2006," Working Papers 022007, Hong Kong Institute for Monetary Research.
  4. Cho-Hoi Hui & Tom Fong, 2007. "Is the Hong Kong Dollar Exchange Rate "Bounded" in the Convertibility Zone?," Working Papers 0713, Hong Kong Monetary Authority.
  5. Wensheng Peng & Frank Leung, 2005. "A Monetary Conditions Index for Mainland China," Working Papers 0501, Hong Kong Monetary Authority.
  6. Bernard Laurens & Rodolfo Maino, 2007. "China," IMF Working Papers 07/14, International Monetary Fund.
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Cited by:
  1. 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.
  2. 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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