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The Internationalisation of Hong Kong Dollar: An Analytical Framework

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  • Kenneth S. Chan

    (Department of Economics, McMaster University)

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    Abstract

    This paper models the macroeconomic impact from the "internationalisation" of Hong Kong Dollar under the fixed and floating exchange rate regimes. A three-region model, the Centre, the Periphery and the Rest-of-the-World, is constructed. The present paper finds that, under floating exchange rates, foreign circulation of home currency increases the volatility of the home exchange rates. Under a fixed exchange rate, however, other than a more volatile level of reserves, foreign circulation has no macro impact on the home economy. This paper also finds that a broader global demand for home asset narrows the gap between domestic and foreign interest rates, which can subsequently lower the likelihood of self-fulfilling currency crisis.

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    Bibliographic Info

    Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 012001.

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    Length: 15 pages
    Date of creation: Mar 2001
    Date of revision:
    Handle: RePEc:hkm:wpaper:012001

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    1. Russell C. Krueger & Jiming Ha, 1995. "Measurement of Co-Circulation of Currencies," IMF Working Papers 95/34, International Monetary Fund.
    2. Brian M. Doyle, 2000. ""Here, dollars, dollars ..."estimating currency demand and worldwide currency substitution," International Finance Discussion Papers 657, Board of Governors of the Federal Reserve System (U.S.).
    3. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    4. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
    5. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
    6. Richard D. Porter & Ruth A. Judson, 1996. "The location of U.S. currency: how much is abroad?," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 883-903.
    7. Bensaid, B.B. & Jeanne, O., 1995. "The Instability of Fixed Exchange Rate Systems when Raising the Nominal Interest Rate is Costly," Papers 9536, Tilburg - Center for Economic Research.
    8. Krugman, P., 1993. "What Do We Need to Know About the International Monetary System?," Princeton Studies in International Economics 190, International Economics Section, Departement of Economics Princeton University,.
    9. Case M. Sprenkle, 1993. "The Case of the Missing Currency," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 175-184, Fall.
    10. Yusuru Ozeki & George S. Tavlas, 1992. "The Internationalization of Currencies," IMF Occasional Papers 90, International Monetary Fund.
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