Dong He (Research Department, Hong Kong Monetary Authority) Frank Leung (Research Department, Hong Kong Monetary Authority) Philip Ng (Research Department, Hong Kong Monetary Authority)
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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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Paper provided by Hong Kong Monetary Authority in its series Working Papers with number
0717.
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
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